Borrowers who are heavily in debt and find themselves unable to repay their full credit card balances will often look up debt settlement information (or debt settlement and debt negotiation information) as an alternative to bankruptcy.

What Is Debt Settlement?

Typically in debt settlement, the credit card company or collection agency will reduce the balance owing and the borrower will repay this amount (usually 35-50% of the original amount) instead of the original balance. Upon acceptance of the settlement, the borrowers will either have to provide a full payment up-front or will need to make regular monthly payments, much like a debt management system, to the creditor.

Debt Settlement Costs

Although borrowers can negotiate their own debt settlement, most will choose to enlist the professional assistance of a company that specializes in this area. The costs of using a specialty company range from up-front fees to monthly payments of fees to back-end commissions on the approved reduced amount. The preferred compensation is a percentage of the reduced amount which only gets paid once the creditors have agreed to the reduced amount.

Debt Management

As a debt management tool, debt settlement is not recommended. There are several reasons for this, such as a reduced credit score. As well, settlements deal only with credit card debt, not student loan debt or car loan debt, and especially not mortgages or domestic judgments. Since debt management encompasses the full spectrum of credit, relying on a settlement only takes part of the debt problems into account.

Tax Implications

When reading up on debt settlement information, borrowers will discover that there are tax consequences to settling debt outside of bankruptcy. In particular, using this technique of debt management will trigger taxable income on 1099-C for any portion that has been reduced.

It should come as no surprise that there is an abundance of debt settlement information out there, especially now with the economic situation being what it is. In a few instances where credit card debt is the only (or almost only) type of debt, debt settlement makes sense. But as a debt management strategy, settlement is not all that great.

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