Debt Hardships - Is Settlement an Option?

Debt hardships arising from job loss, divorce, or illness can wreak havoc on a person's financial stability. If you are behind on your payments and see no way possible of pay off your unsecured loans, then debt settlement might be an alternative for you. 

Debt Settlement Basics

Most people who qualify for debt settlement have more than $10,000 in unsecured loans, such as credit card balances, medical bills, signature loans, and debts for services.

With debt settlement, an agreement is reached with you creditors to lower the amount you owe on your unsecured loans. Businesses are often willing to settle for less than the total balance when they feel that a person is likely to have their obligations cancelled through bankruptcy proceedings. Once the settlement agency reaches an agreement with your creditors, you then make payments until the reduced balance is paid off.

If you are facing overwhelming debt hardships, the following information can help you decide is debt settlement might be an option for you. If you are more of the do-it-yourself type, you can learn how to negotiate debt settlements yourself, but that is beyond the scope of this article. 

When is Debt settlement an option for Debt Hardships?

  • When you have been unable to make your payments for several months in a row. 

  • When you don't qualify for credit counseling because your unsecured loans total more than $10,000. 

  • When you don't have any assets or equity in a home that would help you qualify for a consolidation loan.

How does Debt Settlement work? 

First, the settlement company will examine your debt hardships to see if you would be a good candidate for their program. If you do qualify, then a plan is drawn up outlining how long the process will take and how much money you will need to pay to make the plan work.

How long does it take? 

In most instances, the settlement process can be completed in two to four years.

How much will my debts be reduced?
Most unsecured loans can be settled for 35% to 50% of the original amount owed, but this can vary due to the settlement policies of each individual creditor.

How much does it cost? 
Some agencies charge a percentage of the total outstanding balances, while others calculate their fees based on how much they save the customer.

How do I find a reputable company? 
You can find companies that will help you negotiate on your unsecured loans in the phone book or online. Another really good online resource is They offer a wealth of information to help you get started.

Will having my debts settled hurt my credit? 

If you've been unable to make your payments for an extended period of time due to debt hardships, then the damage is already showing up on your credit report. Once a settlement agreement has been reached with your creditors and the account is paid according to the agreement, your credit report will reflect that the account has been settled and show a zero balance.

Your credit score will begin to slowly recover over a period of 12 to 18 months.  Plus, debt settlement reflects much better on your credit report than filing for bankruptcy. A bankruptcy can stay on your credit report for up to 10 years and requires filing paperwork with the court. Debt which are settled will reflect "settled" on your credit report for seven years (unless you can convince your creditor to not report the payoff as a settlement). Even so, this designation doesn't hold the same stigma as a bankruptcy filing. 

How will debt settlement affect my taxes? 

It's important to note that any amount forgiven through settlement is considered taxable income. This means that you will need to report it to the IRS. Talk with your settlement company or a tax preparer to find out the proper way to report it.

What else should I consider?

 If you're thinking about using a debt negotiation firm to help settle your unsecured debts, do your homework first. You should:

  1. Check the company out with your state Attorney General or the Better Business Bureau before signing up. They can tell you if there are any consumer complaints on file against the company that you are considering.

  2. Make sure the agency will work with all your unsecured loans.

  3. Understand what fees will be charged, what services are associated with the plan, and how the settlement agency will be paid.

  4. Get everything in writing and read over your contract carefully. 

Overcoming debt hardships takes time, but it is worth the effort in the long run. After you get your finances in shape, you won't have to worry about the past-due notices or collectors calling when you're setting down to supper.

Below are some more articles that discuss other ways to handle your debt hardships:

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