Credit Card Debt - How The Debt Settlement Process Works

Unlike credit counseling, debt settlement negotiates your balance

, not just the interest rates. This is ideal for consumers whose accounts are already with the collection agencies. The settlement company attempts to decrease your total amount owed in a short period of time, typically one to three years. Interest has increased recently in debt settlement as an alternative to bankruptcy. That is because of the new bankruptcy law that was enacted on October 17, 2005. This law was a rude awakening for many consumers seeking a fresh start in bankruptcy court.

It used to be that 7 out of 10 people filing personal bankruptcy were granted Chapter 7 status, where your unsecured debts were totally wiped cleaned. The new laws change that. If your income is above the median for your state, or you can pay back at least $100 per month toward your debts, then Chapter 7 is not an option. Instead, you are granted Chapter 13, where you are required to pay back a portion of the debt over the next three to five years. For many it gets even worse because the court calculates your allowable living expenses, using the approved IRS schedules, not your actual documented expenses. So even if you feel that you cannot pay $100 per month or more, the judge could see differently. Instead of a fresh start, many people will be faced with the grim reality of a challenging five year plan, on a court-mandated budget that forces you to adopt a lower standard of living. While debt settlement is NOT for everyone, this approach is for people who would be otherwise filing for bankruptcy. Debt settlement does have a negative impact on your credit score, however if you are on the verge of bankruptcy does it matter what you credit score is?

If you are considering this option and you have debt, you have to choose one Good Credit or Debt Free. For most people with large amounts of debt, credit is not worth worrying about. It would be similar to worrying about how your yard looks after your house has burned to the ground. Unfortunately, you may have pay taxes on the amount of debt that is forgiven. This is a possibility, but the amount is still lower than if you paid the debt back in full. Also the IRS allows insolvent taxpayers to exclude canceled debts on their taxes. So if you qualify so you may not pay anything extra in taxes. This is something you should definitely consult your tax professional before proceeding.

With debt settlement, you can decide whether you want to do it yourself or find a company to help you. If you are not easily intimidated, the do-it-yourself approach is the way to go to avoid additional cost. Hiring a professional settlement company may be the way to go for those who cannot handle any more pressure from creditors or financial institutions. Or maybe you just want to focus your time and energy on more positive endeavors.

by: Hillary D Price

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