Debt Settlement

Debt Settlement is a process where you agree to pay a portion of your debt and the creditor agrees to forgive the remainder.

There are two means for accomplishing debt settlement. One method is to contact your creditors directly and use any liquid assets (savings accounts, 401(k) assets, etc.) you have available to reach a mutually acceptable agreement.

The other method is to work through a company that specializes in debt settlement. These companies, however, usually charge high fees and frequently take months, if not years, to settle your debts. Typically, you will make scheduled payments to the company until adequate funds are collected to settle a debt with one or more of the creditors. In the meantime, your credit report is still reflecting the unpaid debt.

There are several negative consequences to consider once a debt is settled. The creditor will report the debt with a zero balance, but will also indicate that the debt was settled. This is a red flag when applying for future credit, as it indicates that you did not repay all of the money you borrowed. The negative information will stay on your credit report for 7 years. Additionally, the creditor will be required to send you a 1099-R for any amount of the credit forgiven and you will have to claim that amount as income on your income taxes.

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American Debt Solutions, Inc., a Non-Profit Credit Counseling Agency is a 501(c)(3) nonprofit organization providing consumers with free credit counseling and education as well as economical debt management services.