Debt Settlement Advice and Tips
This article isn’t for the purpose of giving you advice about how to settle your debt, rather it’s about the things you should consider prior to doing so.
There are a fair amount of nuances to weighing debt settlement as an option. This article’s purpose is to help you think about some of the more important considerations to make. Considerations that may not come to mind, since you have probably never needed debt settlement services previously.
- Enrolling when you’re on time with your payments
- Debt settlement fees – Most companies charge 20% of what you owe
- If you’re married or have a partner
- Length of debt settlement program
- Compare debt settlement vs bankruptcy
- Debt settlement and taxes
Enrolling when you’re on time with your payments
The best debt settlement advice I can give you if you’re on time with your payments is to consider if your situation is temporary.
Debt settlement will adversely impact your credit. If your situation is temporary, you may be able to solve your problem and maintain your good credit too, by deferring your payments.
Learn more about deferments.
Debt settlement fees – Most charge 20% of what you owe
The best debt settlement advice I can give you about debt settlement fees is to make sure you’re not paying more than what’s necessary. The typical fee is 20% of what you owe. I charge 15% of what I save you if your accounts are with your original creditors when you hire me. And I charge 12% of what I save you if your accounts are with collection agencies or attorneys when you hire me. Let’s look at the difference…
I will use a consumer with $30,000 in enrolled debt for the example
My Debt Settlement Fee
15% of what you save
Typical Debt Settlement Fee
20% of what you owe
|Settle debts at 60%||$1,800||$6,000|
|Settle debts at 50%||$2,250||$6,000|
|Settle debts at 40%||$2,700||$6,000|
|Settle debts at 30%||$3,150||$6,000|
As you can see, the difference is substantial. Even if I averaged 30% settlements on your accounts, you’ll pay 47% less than a typical debt settlement fee.
If you’re married or have a partner
If you have a spouse or a partner, the best debt settlement advice is to make sure it is necessary for both of you to enroll. There are a few things to consider.
If you and your partner have $40,000 in credit card debt but $30,000 of it is just in your name, it would probably make sense for your partner to maintain their payments instead of ruining their credit by settling their debts.
This way, one of you will be able to keep up your good credit. So if a need for credit arises, prior to rehabilitating from debt settlement, you’ll have a better chance obtaining it.
If you would like me to review your situations separately, please feel free to contact me for a free consultation.
Length of debt settlement program
The longer your debt settlement program is projected to take, the less likely you will successfully complete it. The reason: while you’re in a debt settlement program you’re not making any payments to your creditors. Meanwhile your creditors are pursuing you for collection. So when you agree to enroll into a long-term debt settlement program, you’re agreeing to play financial chicken with your creditors for the duration of your debt settlement plan.
This is dangerous for you when you consider the increased probability of being sued once you go beyond 12 – 18 months of delinquency.
This is one of the main reasons why the only way to reliably settle someone’s debt is to review their ability to resolve their debts via their assets rather than their future income.
When you settle your debts over time, by funding your debt settlement program with your income, it’s pretty much game over if you’re garnished. Simply because, the garnishment would more than likely eliminate your ability to continue to fund your debt settlement program.
This is why I limit my debt settlement services to people who have resources that will enable them to settle right away. It’s the only way to offer debt settlement in a successfully reliable way.
If you lack access to a resource that would allow you to settle your debts right away: I recommend settling them yourself, due to the premature representation aspects of debt settlement.
But, please understand: the key to being successful with debt settlement is the amount of time your remaining debts go unpaid. I don’t recommend settling your debts if you think it will take more than 24 months (ideally less than 12 months) to settle all of your accounts.
Compare debt settlement vs bankruptcy
Debt settlement is a viable alternative if you can settle your debts quickly. If you can’t settle your debts quickly, Chapter 7 bankruptcy may be more appealing than you realize. Review my chart to compare your debt settlement and bankruptcy options.
Debt Settlement and Taxes
Expect your creditors to send a 1099c for the amount of the difference between your balance and what they agreed to settle for. Fortunately, there is an insolvency form that you or your accountant can provide to the IRS when filing your return. This insolvency form acts as a worksheet for your overall debt versus your overall assets.
If you have more debt than you do assets, you will be considered insolvent and not liable for any taxes. I urge you to speak with a tax professional in reference to your situation before committing to settling your debts: it is very important to become aware of this potential cost first.
For additional reference to the insolvency exemption, please see IRS Publication 4681.
If you’re contemplating the idea of settling your debts, please don’t jump in head first. Please refer to my detailed breakdown of the “typical collection cycle” to gain a better understanding of how debt settlement works.
I hope this debt settlement advice helps you consider some things that you may have not considered otherwise. Please feel free to contact me or comment below with any questions or comments that you may have.