What is Debt Settlement?

[anonymous]

what is debt settlement

[Bankruptcy Helper]

Bankruptcy is a legal process which allows debtors, who are unable to repay debt owed to a creditor, to either discharge the debt or restructure some of their debt payments. It is generally considered a last resort, because of the negative impact it has on the credit score of the person declaring bankruptcy, because it can force the person to liquidate assets he would prefer to keep, and because a bankruptcy can stay on your credit report for up to 10 years.

What if you do not want to file for bankruptcy? Is there another way to resolve debt you cannot afford to pay? Yes, through debt settlement. Debt settlement allows debtors to negotiate with the creditor to pay an amount less than the total amount owed.

A creditor may be willing to accept debt settlement if they believe you are unable to pay the debt in full and may resort to declaring bankruptcy, in which case the creditor may have to wait in line with other creditors and possibly receive nothing. Debt settlement may be preferable to bankruptcy because it will not impact your credit rating or result in any additional negative impact on your credit report.

For a creditor to consider a debt settlement, they generally will want to see documentation that proves your financial hardship. This means you may have to provide paystubs, bank statements, and possibly other financial documents to prove to the creditor that you cannot afford to pay the amount in full.

If you do not wish to provide evidence of your financial hardship to the creditor, the creditor may still accept a debt settlement proposal, but it will usually be for a higher amount than if you are willing to provide evidence to establish financial hardship.

Some creditors may allow for the structuring of a debt settlement in an installment plan rather than as a lump sum payment, but generally, a creditor will accept a lower amount if you offer a lump sum payment rather than an install plan spread out over several months.

Any amount of debt forgiven by a creditor is generally considered to be income for tax purposes, so you will have to pay taxes on the amount forgiven when you file your federal income tax return in the year the debt forgiveness occurs.