Debt Settlement Alternative

It's a little-known fact that when you fall further and further behind on your payments, creditors would much rather agree to settle your debts than have you file bankruptcy and not get paid at all, says debt expert Gerri Detweiler, author of "The Ultimate Credit Handbook." In exchange for an agreed-upon one-time payment -- typically, between 20% and 75% of what you owe -- the creditor forgives the rest of your debt and starts reporting it to the credit bureaus as settled.

There are two ways you can settle your debts:

1. Negotiate with the creditor yourself. You'll need a fairly large amount of money at your disposal to negotiate with the creditor yourself. Call the creditor, explain that you're seriously considering bankruptcy and tell them why you're in this situation (e.g., you've recently lost your job, etc.). Tell them that you'd like to offer a debt settlement and propose an amount. They'll probably counter offer. Negotiate with them until you reach a settlement you're comfortable with. Have the creditor send the agreement to you in writing. Make it easy for them by offering a fax number to which they can send the agreement. Once you have the agreement in writing, make the payment as agreed with a money order or cashier's check.



2. Hire a reputable debt settlement company. With this approach, you are depositing money into an escrow account. Once the account has enough money, the debt settlement company will contact the creditor on your behalf and start the negotiation process. Although you end up paying them a fee, you won't have direct contact with the creditor and professionals typically know just who to speak with and what to say to negotiate the best possible deal for you. Just, remember to check your account balances credit reports regularly to make sure that they are paying the creditors as agreed.

Important Note : Twelve states prohibit for-profit debt management. If you live in Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia or Wyoming, you cannot have a for-profit debt settlement company work for you, even if they are based in a different state. In this case, you'll have to negotiate with the creditors yourself.

Why Creditors Would Accept a Debt Settlement
The creditor's primary incentive is to recover funds that would otherwise be lost if you filed for bankruptcy. The other key incentive: the creditor can often recover more through debt settlement than through other collection methods. Collection agencies and collection attorneys charge commissions as high as 40% on recovered funds. Bad debt purchasers buy portfolios of delinquent debts from creditors who give up on internal collection efforts and only pay between 1 and 7 cents on the dollar.

Who's a good candidate for debt settlement?
You could be a good candidate for debt settlement if you're heading toward bankruptcy but don't qualify for filing Chapter 7, says Charles Phelan, founder of ZipDebt.com. So, it's a viable alternative to Chapter 13, which sets up a three- to five-year schedule with your creditors to repay your debts. Just remember that there are tax implications with debt settlement. For example, if your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability. However, if you're insolvent, you can petition the IRS to waive that tax liability by filing Form 982.

Some accounts may be difficult or impossible to settle.
Tax liens and domestic judgments are unaffected by attempts at settlement. However, there are attorneys that specialize in IRS and state tax settlements that may be able to help you. With student loans, you may be able to negotiate forbearance, consolidation or other way of helping you to better manage the payments. Some lenders offer partial or full forgiveness on student loan balances. On secured loans (e.g., car loan), you may be able to negotiate down past-due fees and interest. It may also be possible to negotiate forbearance, as well. Some individual creditors, including Discover Card, have an aggressive resistance against negotiations.

How to Choose a Debt Settlement Company
Some general guidelines on choosing a debt settlement company: choose a company that is accredited by Association of Settlement Companies (TASC) and has certified debt arbitrators. It is also best to choose a company that is a member of a Business Association, Chamber of Commerce, or recognized by Dunn & Bradstreet, is bonded and one that indicates their physical address on their website. Debt Settlement Outlet is one debt relief company that we recommend who advises consumers to work with professionals that charge only after a settlement is made, and charge about 20 percent of the amount by which the outstanding balance is reduced.