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As a financial adviser, I have assisted numerous clients in treading the waters of debt delinquencies. In many of these cases, debt settlement agreements have been the quickest and most financially beneficial method of clearing a debtor's delinquencies and avoiding bankruptcy.
Here are some key factors to take into consideration when deciding whether or not to enter into a debt settlement arrangement.
Do contact the lender directly . Many credit repair agencies charge a fee to help you manage a debt repayment schedule; others are outright scams and can actually make your situation worse. Pick up the phone and call your lender yourself. I always recommend starting with an offer of 30% of the outstanding balance, especially if a major portion of the balance owed is now comprised of late payments and exorbitant interest fees over and above the actual principal balance.
Do explain your situation accurately but limit information as to why you can no longer pay a debt for which you are financially obligated. If you have recently lost your job, experienced the death of a primary household wage earner, or had similar financial catastrophe, make sure the lender realizes that they have no real prospects of collecting the debt in full and a settlement is a good financial decision for them as well.
Do require that you are reported as paid in full, and that all three major credit bureaus are notified. Your lender will not necessarily do this automatically. The lender may choose to report the account as "settled in full" or simply "paid," which will still set off negative alarm bells to anyone considering offering you credit down the road.
Do realize that you are resetting the reporting clock. Debt settlement agreements will actually extend the time that a poor account will be reported on your credit bureau credit report. The seven-year limitation is from the date of last activity, so a payment (any payment) will reset the time clock for the bureaus to report your delinquent account.
Do get it in writing . A verbal agreement will be of little benefit if the balance of your account is turned over to a debt collection agency.
Don't make a settlement agreement you cannot live with . While many agreements call for lump sum payments, some lenders will allow a debt settlement to be paid over a relatively short period of time, usually one, two, or three months. However, if you renege on one payment, even if it is the last one of the settlement agreement, it can void the entire agreement, allowing the lender to keep the payments you have made and resume collection efforts on the entire outstanding balance.
Don't ignore the tax consequences of a debt settlement arrangement. The amount of the debt that has been forgiven is reported to the Internal Revenue Service as income, and, yes, you must pay taxes on the amount that was written off.
Don't forget the lessons learned . Debt settlements are not the preferred method of satisfying your debt arrangements, and they still leave black marks on your credit report that can last from four to seven years.
More from the contributor:
The Financial Pitfalls of Credit Card Cash Advances
Should I Use My Debit Card Overseas?
The Benefits of a Virtual Credit Card
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