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When Debt Settlement is Right for you

Debt settlement is a form of debt relief that can be helpful for people who are in specific situations. However, there may be other alternatives that will be more beneficial. If you do choose to go through with debt settlement, there are a few things that you need to know.Debt settlement is for those who have debt that has been charged off and given to a collection agency. Once the debt is with a collection agency, different tactics are used to receive payment from you. Collection agencies are usually more aggressive, using phone calls, letters, and other methods to encourage you to pay them what you owe or to settle with them. Because they bought the debt from the original creditor at a lower price, they are willing to settle for a smaller amount as they can still make money off of it. That is what debt settlement is all about.

You can directly negotiate a settlement with each collection agency and come up with an amount that you both can agree to that can cancel out your debt. Unfortunately, you must pay the amount agreed to in full. No payment plan will be accepted. However, this amount can be significantly less than the original amount owed, so it can give you significant savings.

Once you have settled with a company, you will no longer receive pestering phone calls and letters from them. You will have to repeat the process with each collection agency you have debt with in order to get the matter resolved in full. Your credit report will reflect that you have reached a settlement on that debt, so your credit score will not entirely bounce back. Another benefit of debt settlement is that by settling with the collection agency, you eliminate the possibility of receiving legal action because of the debt in the form of a judgment.

One problem to look out for when settling debt is that forgiven debt larger than $600 is reported to the IRS, and thus subject to taxes. This is a cost that should be considered when determining if debt settlement is right for you. Also, beware of companies who offer to negotiate debt settlement on your behalf. They are not able to obtain any greater benefits than you can do on your own, but they will charge you a large fee to do it. They may also require you to pay them up front while they try to work out a deal with the collection agencies.

If some of your debt is not yet been charged off and is still with the original creditors, you will most likely benefit from a debt management plan instead. This type of plan has you pay off your debt in full over a reasonable amount of time. This can work out because creditors like to see that you are working to pay off your debt and will offer you better interest rates. If this is something that might interest you, talk to a credit counselor today.

Debt settlement is not right for everyone. Before agreeing to any settlement or to work with a debt settlement company, do your homework. Find out if this is the best deal for you. If you are unsure, talk to an accredited credit counselor who is more familiar with the options available and the tricks that debt settlement companies might try to use on you.

Ronnica Rothe is a graduate with honors from the University of Oklahoma and a current student at Southeastern Baptist Theological Seminary. She works with Personal Financial Network to help individuals get out of debt and reach their financial goals.
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