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Frequently Asked Questions about Debt Settlements

What types of debt qualify?

Unsecured debts such as credit card debt, tax debts, medical debts and personal judgments may qualify for settlement. Credit card debts are the most common form of debt that is settled, especially as credit card companies have increased interest rates and fees on consumers during the recession.

Examples of secured debts that would NOT qualify are a home mortgage or car loan, since the lending company can simply repossess the underlying asset.

How much debt is required to qualify for a settlement?

Generally speaking, at least $7,500 in debt is required in order to qualify for a debt settlement program. If a consumer has less than $10,000 in debt, they might try negotiating with creditors directly, creating an individual savings plan, or taking a lower interest rate loan out against a secured asset (like a home) to pay off the higher interest rate debt and reduce monthly payments.

How does a debt settlement work?

A debt settlement program is designed by a debt settlement company to help an individual save enough money to negotiate a settlement with creditors. A good debt settlement strategy should include specific goals such as the amount to be saved each month, the total amount to be saved, and a target completion date for the settlement to be executed.

How long does the debt settlement process take?

This depends on a variety of factors including the amount of the debt outstanding, the age of the balance, the funds available to be used as part of the settlement, the individual’s ability to save additional funds as part of the debt settlement program, and the willingness of creditors to negotiate the settlement amount. As a benchmark, programs can take 24 – 36 months or longer. An accredited debt settlement company will help establish a custom debt settlement program that will include a target date for completion.

How much does it cost?

Debt settlement fees vary by company as well as state. Typically, a debt settlement company will base fees on a percentage of the total amount owed or the amount saved. Companies collect their fees from the first few payments made or over the course of the payment plan. For this reason, it pays to shop around; but don’t necessarily assume a company with lower fees or a favorable payment structure is the best option. It’s also important to consider track record, accreditations, and experience of the representative that would be handing the case.

Using some numbers for illustrative purposes, a successful debt settlement program may include a goal of settling for 60% of the total amount owed, plus 15% of the outstanding amount going to the settlement company as fees for service. This results in a net discount of 25%. Assuming a $20,000 debt, this means the consumer saves $5,000 on the original amount. More importantly, the individual has been relieved of the debt and no longer has to struggle each month to meet the minimum payment—an amount that may have been growing due to late fees, increased interest rates, etc.

Will a settlement affect my credit?

In the short-term, it’s possible that a debt settlement program could adversely impact an individual’s credit rating. However, if the consumer is truly concerned with the status of their credit, then the outstanding debt should be addressed.

Are there any consequences from a tax perspective?

A debt settlement could become a taxable event for an individual under the Discharge of Indebtedness rule from the IRS. Essentially, the IRS may view an individual’s relief of debt as a form of income. The best solution is to consult a qualified tax professional to determine how a debt settlement will impact his/her financial situation.

Are there other options outside of a debt settlement?

Yes, common alternatives to a debt settlement are credit counseling and credit consolidation. Credit counseling is a debt management strategy in which a qualified advisor literally helps an individual develop a plan for reducing debt. Credit consolidation combines multiple debts into one loan with a lower interest rate and thus lower monthly payments. It is possible to utilize these strategies in addition to a debt settlement. For instance, it may make sense to settle a large and troublesome credit card debt while consolidating other debts.

Can I negotiate my own settlement?

Absolutely. Any individual can take the debt settlement process into their own hands and try to negotiate a settlement with creditors. Many people choose to hire a debt settlement company because of the experience factor. Others simply do not want to negotiate with creditors.

How do I select a company?

If you would like an accredited debt settlement company to contact you for a free initial consultation, fill out the short questionnaire at the top of this page. There is no additional obligation.
Another good starting point is to review our list of accredited debt settlement firms. Look for companies that are members of The Association of Settlement Companies as well as the Better Business Bureau. Any reputable company will provide a free initial consultation in which you can ask many of the same questions provided in this FAQ.

Does hiring a debt settlement company guarantee success?

No. Even the very best debt settlement company can’t guarantee success if a creditor does not want to settle. However, speaking to a credible debt settlement company prior to signing a contract to describe the situation is a smart approach. Ask if the company has handled similar cases and what the success rate has been. In fact, ask as many questions as it takes to feel confident that a settlement can work for you.