The Pros and Cons of Negotiating debt

When you first look at debt negotiation is looks like a quick easy way to get rid of your debt. But before you take the leap and do it, or hire out to get it done, you need to understand the process and what will benefit you and be bad for you.

Most people hire a debt settlement company to do the dirty work for them. The first process they will do is have you stop making any payments toward your debts. Instead, the company will set up a trust account for you to put your payments into. Then once the account has enough money (between 25-50% of the total debt you owe) the company will begin negotiating a payoff amount with your creditors. Typically this amount will be no more than the cash you have already accumulated in their trust account. Once an amount is settled on, the company will pay the debt off in one lump sum.

Not everyone will benefit from debt negotiation. Everyone circumstances are different and so they should thoughtfully reviewed before a course of action is set. First of all you have to be at least 3 months in arrears in order to be considered for this program. Second, it will sting your credit because you will be forgiven some of your debt. And last, you will most likely receive a 1099 form at the end of the year with the amount of the forgiven debt and have to pay taxes as if you made that money. However, for a person that is facing bankruptcy as the other option, this is a far better plan. Also, it will help with stress, because a settlement company will be screening all the calls from your creditors instead of you.

Some disadvantages of it are that you will have to pay a company if you hire them a lot (typically 20% of the debt that is forgiven). You will get bad credit ratings (when you stop making your payments in order to negotiate). You will have to pay taxes on the forgiven amount. And last, your credit report will show the debts as “paid as agreed” or “settled”

Weigh the options carefully and then decide whether debt negotiation is right for you.

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