What is Debt Settlement?
Debt settlement, often called debt negotiation, may be a good option for a consumer with outstanding personal debt. While bankruptcy may often be the best option to reduce the consumer’s overall debt and get a fresh start, bankruptcy may not benefit a consumer in every situation.
Debt settlement is basically an agreement between the creditor and the consumer that allows the consumer to pay a sum of money which is less than the total amount owed to the creditor in order to eliminate the entire debt. For example, if you owed $5,000 on a credit card, an attorney could contact the creditor on your behalf and offer to pay a lump sum of $2,500 as a way to settle the entire amount. In this example, the consumer would pay only 50% of their total debt.
Most personal debt can be settled as long as the creditor is willing to negotiate. In most cases, creditors are willing to negotiate.
Advantages of Debt Settlement
The goal of debt settlement is resolving the outstanding balance on debt for significantly less than what is owed.
In some cases, a person may not qualify for a bankruptcy or there may be consequences from a bankruptcy that they would prefer to avoid. Debt settlement is an alternative for those individuals to get their finances back on track.
Although a debt settlement can show up on a consumer’s credit report that the debt was settled, the debt settlement will report for a shorter time frame and have less of a negative impact than if the consumer files for bankruptcy. Negotiating a settlement does indicate that the consumer took responsibility for paying a portion of their debt and their credit report will show that the debt is satisfied.
How Can an Attorney Help?
Hoglund Law offers a team of highly experienced attorneys to analyze the individual’s current debt situation. This involves reviewing the amount of debt the individual owes, which creditors the debt is owed to, determining the individual’s financial history, and advising them on what the best option is for them to obtain financial freedom.
Many people struggle to pay their debts or keep up with their consumer loan payments. Creditors know that if a consumer files for bankruptcy protection, they may lose their ability to collect on a debt altogether. Therefore, many creditors are willing to accept a settlement for less than the full amount owed. Since companies are in business to make money, many will basically cut their losses and opt to be paid a reduced amount to settle the account quickly.
Additionally, creditors are often more willing to consider debt settlement for consumers who are represented by counsel, especially when that counsel is an experienced bankruptcy attorney who can easily file a bankruptcy for them. Creditors know that in a bankruptcy they could receive nothing as opposed to the reduced amount they would receive in a settlement.
How Do I Start?
After a free consultation with an experienced attorney from Hoglund Law, our team will explore all options for resolving your debt.
In order to begin the process, you must provide our office with a list of all your debts, the last time you were able to make payments, and proof of your earnings and expenses so that the attorney can put together a strong case to show your creditors why you are experiencing financial hardship.
Although a creditor is not obligated to participate in debt settlement, having an attorney can help convince them to negotiate by presenting the specter of bankruptcy. This can be a very powerful negotiation tool especially when working with an attorney from a firm known for its bankruptcy practice.
Generally, a creditor will not settle a debt when the consumer is making all of their monthly payments on time. However, once a creditor is not receiving payments they may be more willing to settle the account.
To discuss your options, please contact our office at 651-628-9929 to set up a FREE consultation with an experienced attorney.
How much can I expect to settle my debt for?
There is no set amount or percentage a consumer can expect to save. It depends on the creditor and the debt. However, a consumer could save 50% or more when using an experienced attorney with our law firm.
Why would my creditors be willing to settle with me?
If a person does not willingly pay their debt, a creditor must take action and expend their resources to collect the owed funds. A settlement allows the creditor to receive some payment without expending much energy. Having an experienced attorney remind the creditor of this and facilitate the transaction can aid in convincing the creditor to accept a settlement as it is the simplest option for the creditor as well as for the consumer.
Are there any drawbacks to debt settlement?
The most obvious drawback is the fact that a consumer’s credit report will show that a debt was settled rather than paid in full. However, generally a debt that has been settled will reflect more positively than a debt that is charged off or results in a subsequent judgment.
Unless and until the debt is fully settled, a debt settlement program offers the consumer no legal protection. Consumers may continue to be vulnerable to collections and the creditors may initiate lawsuits. Consumers will also continue to accrue additional fees and interest on their outstanding balances while the debt is being negotiated for settlement.
What are the tax consequences of debt settlement?
The creditor may issue a 1099 for earned income in the amount of outstanding debt that was not paid in full and the consumer may be required to claim this on their tax return as income.
However, if a person is considered insolvent, which means the inability to pay one’s debts in full, they can usually have their forgiven debt excluded from their income for tax purposes.
Due to the complicated nature of income tax preparation and individual situations, it is important to first discuss your specific situation with a tax professional or tax attorney. Our clients must contact a tax and accounting professionals to discuss the potential IRS and Minnesota Department of Revenue consequences of debt settlement.
The contents of this website are intended to convey general information only and not to provide legal advice or opinions. Not all clients are able to complete the debt settlement program for various reasons, including their inability to save sufficient funds and/or their creditor’s unwillingness to negotiate the debt. Success in a debt settlement program will depend on the specific circumstances. HCM does not guarantee that a client’s debts will be resolved within a specific period of time or for a specific amount or percentage. Not all debts are eligible for a debt settlement program. We do not assume your debts, make monthly payments to creditors or provide tax or accounting advice. The use of debt settlement services may result in accrual of additional fees and interest on the outstanding balances, further collection actions, which can include lawsuits or judgments, which could adversely affect a client’s credit report. It is important that our clients read and understand all program materials prior to enrollment.