You’ll start the process by putting away money in preparation for debt negotiations. Your settlement company will tell you the total amount you need to save in advance. You’ll make a monthly payment into a dedicated bank account for several months or years, depending on your monthly budget and anticipated amount to be resolved. The account will be in your name and should be insured by the Federal Deposit Insurance Corporation (FDIC). It will be overseen by a trustee or account administrator.
Negotiating Your Debt
As you build up your account, this money will be used to bargain with your creditors on your behalf. You will have the final say on the terms and how your money will be used to pay off the negotiated amount before accepting an agreement. Once those negotiations are successful, your debts will get paid off one by one.
Signing a Credit Card Settlement Agreement
After you come to an agreement on a credit card settlement, put all arrangements in writing for your records. Be sure you and your credit card company sign the agreement. At this point, the account administrator will be responsible for transferring funds from your account to pay your creditor.
Speak with a tax professional if the debt amount covered by the settlement is more than $600. If so, you likely will be required to pay income taxes on that amount because the Internal Revenue Service can consider forgiven debt as income.
How Debt Settlement Affects Your Credit
It’s important to know that your credit scores have already declined if you’re at the point of resolving your credit card debt or other debt. Although this can be stressful, your top priority should be to get out of debt and get your finances back on track.
Talk to your credit card company about whether it will report your agreement as a settlement to the credit bureaus. If so, that settlement could appear on your credit report for about seven years and may damage your credit score. Ask your credit card company to report the settlement as paid in full instead. Once your debts are settled and wiped away and you are keeping your financial house in order, your credit scores will move up.
Alternatives to Debt Settlement
Don’t panic if your creditors won’t settle. You have other debt options: Credit counseling, debt management, debt consolidation, and, in extreme cases, bankruptcy.
In debt consolidation, a borrower takes out one big loan to pay off smaller debts, typically achieving a lower interest rate in the process. A debtor will pay one bill every month instead of several bills, but if they are unable to pay the consolidated, secured debt, there is no more wiggle room.
Debt Management Plans
In credit counseling, agencies can set up low-interest debt management plans so that borrowers can pay off unsecured debt over time. A debt management program (DMP) reduces your monthly payments so you can eventually pay off your debt in full.
Personal bankruptcy should always be considered the last resort, and the worst option for anyone battling debt problems. It will negatively affect your credit, prevent or delay foreclosure on a home and lead to repossession of a car. In addition, filing for bankruptcy can be complex and costly.