September 19, 2018

Understanding Debt Negotiation And Settlement

Debt negotiation and settlement is an approach to resolving the financial problems of an individual who owes a large amount of unsecured debts. The debtor and their creditors agree on the payment of a reduced amount, which will be regarded as settling the account in full.

Debt Negotiation And Settlement

It is possible for individuals to negotiate directly with their creditors, but in many cases individuals will employ a third party, such as an attorney or a specialist company to negotiate on their behalf. A number of objections have been raised to the negotiation approach, including the potential for damage to the debtor’s credit rating, and the possibility that debts being written off will be assessed as income for tax purposes by the IRS.

From the creditor’s point of view the benefit of accepting a lower level of payment for the debt, is that it would be better to get a reduced payment, than to possibly get nothing at all if the debtor files for Chapter 7 bankruptcy protection. From the debtor’s point of view the benefit of a negotiated agreement, is the ability to have part of the debt forgiven (or written off), and to avoid the stigma and credit rating damage caused by bankruptcy.

It should be noted that only unsecured debts such as credit card balances and medical bills can be written off by an agreement. Loans to purchase homes and cars are secured, and failure to pay in full will lead to loss of the home or the car. Student loans are also a special case, as creditors have special powers to attach bank accounts for these.

It is possible for individuals to negotiate agreements for themselves directly with their creditors. This can save on fees which would need to paid to an attorney or specialist company, but it is problematic for individuals to do this without access to a lump sum.

Many people seeking settlement will go via a debt settlement company. Normally these charge fees, often as a percentage charge on the amount of debt that has been written off. Ideally the debtor would have some lump sum available to pay the settlement offer, but this is rarely the case.

Money must therefore be saved up to make the offer. Good practice, as define by TASC, The Association of Settlement Companies, is that this must be either in the customer’s own private savings account, or in a third party FDIC insured account. It should never be in an account controlled by the company. Additionally, according to TASC, no legitimate company should advise the debtor to stop paying their credit card minimums.

One disadvantage which has been noted for the debt settlement is that partially canceled debts are required to be reported as taxable income. Debtors who are insolvent at the time of the cancellation are excused from this requirement.

There are two professional associations covering the industry: USOBA (United States Organization for Bankruptcy Alternatives), and TASC (Trade Association of Settlement Companies). Information about the industry can be found on their respective websites.

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