Suppose you’re behind on your bills but can come up with a portion of the balance. Debt collectors often mention the option of making a single payment in exchange for wiping out the unpaid balance.
You might consider settling your debts to resolve your overdue bills and rebuild your finances.
But is debt settlement a good idea, or could it worsen your problems?
Sadly, there’s no universal answer when it comes to debt settlement. Instead, the decision of whether to settle comes down to 6 considerations.
How many debts do you have? Suppose you have only 1 or 2 outstanding debts. In that case, consider settling your debts rather than another debt relief option, such as bankruptcy. With fewer open accounts, it’s more likely that you’ll be successful in your settlement negotiations. On the other hand, when you’ve got a large number of creditors, it’s more challenging to get them all to fall into line.
What types of debts do you have? Some creditors will talk about settlement, while others won’t. For example, credit card companies may be willing to accept an amount lower than what’s due to pay the debt in full. In addition, many private student loan holders will negotiate settlements. Federal student loans, however, settle only in limited situations and rarely at an attractive discount.
Do you have the money to settle your debts? Creditors usually require that settlement funds be paid immediately or within a few months. Therefore, your negotiations are more likely to be successful if you have the money to spend on a settlement.
Can you live with the tax fallout? A creditor who agrees to forgive more than $600 of the balance due must send you a Form 1099 at the end of the year, and you may have to pay taxes on the forgiven amount. There are some situations where you can get out of the tax obligation. Still, you want to sit down and talk with your tax professional before settling your debts.
What’s the impact of settlement? When you settle a debt for less than the amount due, your credit report is updated to reflect that fact. The settlement notation can remain on your credit report for up to 7 years.
Do you need the money? Even if you’ve got the cash to fund a settlement of your debt, you need to consider the others uses that may exist for that money. Whether it’s a savings account for retirement, emergencies, or home repairs, it’s important to remember that settlement will hit you in the wallet, so plan accordingly.
Settling your debts might be the right choice for you. Consider all your options for getting out of debt before making a decision that could make your situation worse.
ABOUT THE AUTHOR
Meet Jay
Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.
I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.
I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.
I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.
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