Debt Settlement

What is Debt Settlement?


Debt settlement is a type of debt settlement practice that allows you to pay a lump sum— typically less than the amount you owe on a debt—to resolve, or “settle”, your debt. Debt settlement is a settlement negotiated with your (the debtor)’s unsecured creditor. In debt settlement, creditors usually agree to forgive a large part of the debt through the negotiation process. Debt settlement results, however, can vary widely.


Steps of Debt Settlement


Step 1 – Hire a debt settlement company. There are two types of debt settlement companies: attorney based and non-attorney based. Using an attorney based company is best in most cases, as the settlement process is operated under the guidance and support of lawyers, offering extra protection and peace of mind.


If you choose to work with a settlement firm that is attorney based, any lawsuits will be handled on your behalf. You should also receive assistance for collection calls and/or letters. Without an attorney based firm, you will be on your own for lawsuits and collection calls.


Step 2 – While you are saving your funds in preparation for delivering the lump sum, you won’t be making payments. Because of this, your credit report will be damaged and your credit score will drop. However, you should expect this. It is common in debt settlement.


Step 3 – You will start a special-purpose savings or a third-party escrow account. You will then make monthly payments into that account, and only you will have control over those payments and that account. As you’re accumulating those deposits, your settlement company’s negotiator will reach out to your creditors. Each debt will be negotiated or “settled” with your permission, and your saved money will be used to pay off the agreed-upon debt balance.


Benefits of Debt Settlement


Using a debt settlement company to settle your debt with creditors could potentially:


  • Lower your debt amount
  • Help you avoid bankruptcy
  • Get creditors and collectors off your back


Risks of Debt Settlement


Debt settlement can be risky, and it’s important to know the risks before you begin the debt settlement process.


  • Your creditors may not agree to negotiate at all.
  • You could end up with more debt or even a lawsuit if you stop making payments.
  • Even if the company negotiates a successful debt settlement, the portion of your debt that’s forgiven could be considered taxable income on your federal income taxes.
  • You may be charged fees by the debt settlement company, even if your whole debt isn’t settled.
  • If you have three or four creditors and your debt settlement company settles debts with just one of those creditors, they can begin charging you for services.
  • It will negatively impact your credit.


What Are The Costs of Debt Settlement?


Be aware that forgiven debt can equal taxable income. The amount of debt that is forgiven may be treated as income, which means you will have to pay tax on that amount (this can be true to the extent of insolvency).

debt settlement

Let Pivotal Wealth Help You Eliminate Debt


Our team at Pivotal Wealth encourages you to work with a reputable firm and a reputable tax professional throughout your debt settlement process. Feel free to contact us with your questions about how to eliminate debt and how you can begin to build your wealth.