Debt settlement can be a good option for those who are drowning in debt. It can bring your payments down to affordable levels if your back is against the wall and your only other way out is bankruptcy. But if you choose to go this route, there are a few things you should know before you begin negotiating with your creditors.

Please know that debt settlement should only be used as a last ditch effort to avoid bankruptcy. Even though it can significantly lessen your debt, it does not come without a price. You will be taxed on any forgiven debt because it is seen by the IRS as income. Settled debts also don’t look so great on your credit report (but of course it’s still better than a bankruptcy).

First things first: you should never attempt to negotiate a debt settlement with anyone other than your original creditor. If your account has been referred to a third-party collection agency, do not have any dealings with them.

You will need to notify your original creditor that you do not have the financial resources to pay your debt, and that if they won’t settle with you, you might have no choice but to file for bankruptcy. The mention of the word ‘bankruptcy’ should get their attention, because they know that if you file for bankruptcy they won’t get any of their money back from you.

If you are currently making payments on your account, you will have to stop if you wish to settle the debt. Creditors won’t consider settlement unless your account is seriously past due.

Proper documentation is important during the negotiation process. Be sure to keep copies of any correspondence you send to or receive from your creditor, and you should also keep documentation of any telephone communications regarding the settlement.

Don’t expect the negotiation to be completed overnight; it can take up to several months for an agreement to be reached.

So what happens after a settlement amount is finally agreed upon? You should first insist on a written statement of the settlement agreement from the creditor, which should include a promise from them that they will never sell the forgiven portion of the debt to another party in the future. Only after you obtain this documentation should you make payment.

You may wish to hire a professional debt settlement company if you would rather not negotiate with your creditors yourself. If you choose this option, don’t hire a debt settlement service without investigating them carefully first to make sure they are legitimate.

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