Debt settlement, which involves negotiating directly with creditors to pay off debt for less than what you owe, is a possible option for debt relief. However, it does come with risks of which you should be aware before you step up to the negotiation table.
First, it’s possible that you could enter into what you think is an agreement to wipe the slate clean, but the creditor has other ideas. If you owe $4,000 and you agree to pay $2,000 and believe the creditor will forgive the remaining amount owed, you must get that in writing in the form of a signed agreement. Otherwise, you might put up the $2,000 in cash and still be on the hook for the rest of the payment with no real recourse.
Second, many people are wooed by the offers of debt settlement companies. These companies say they can negotiate with your creditors and position themselves as having some type of leverage that you don’t. The truth is that these companies don’t normally have any more power over debt than you do. If you can pay a debt settlement company $1,000, you could negotiate with the creditor yourself for the same amount. If the creditor won’t accept $1,000 from you, they certainly won’t accept the amount the debt settlement company might offer, which would be less any fees charged by that company.
Third, debt settlement can leave you owing additional taxes. When debts are forgiven, the Internal Revenue Service sometimes looks at this like a form of income, and you have to report it on your tax return.
If you are struggling to pay back your debts and haven’t been able to reach an agreement with creditors yourself, consider speaking with a bankruptcy lawyer instead of a debt settlement firm. A bankruptcy lawyer can provide information on all of your options.
Source: Federal Trade Commission, “Settling Credit Card Debt,” accessed June 17, 2016