Negotiation with Debt Collectors

Most Americans have debt in some form or another. Whether it’s a mortgage, credit card debt or a car loan, it is a common and accepted practice to purchase things on credit. When you have too much debt, however, it can seem like an endless struggle between paying your current bills and paying back the creditors you already owe money to. Many people in this situation feel consumed by their debt and fear that there is no way out except to file bankruptcy. What they don’t realize, is that there may be another option available through a debt negotiation.

Pros & Cons of a Debt Negotiation

Making regular payments on your debt is the safest and most surefire way to resolve your relationship with a creditor and protect your credit score. Sometimes life gets in the way and making your original payment is no longer an option. If you find yourself in a situation where you are no longer able to make regular payments on your account, debt negotiation may offer an attractive alternative. Listed below are some of the positives and negatives of reaching a settlement with your debt collectors:

Pros

  • You may be able reduce the amount you owe
  • You can usually resolve the debt with one lump sum payment
  • You can avoid filing for bankruptcy

Cons

  • You’ll may have to pay taxes on debt forgiveness
  • Your credit score can be negatively impacted

You can reduce the amount you owe.

The point of a debt negotiation is for you and the debt collector to make an agreement that fits in your budget, sometimes this may mean accepting a lesser amount than you owe. Instead of charging off an account, creditors would much rather work with you in order to receive some form of payment. This is where negotiating your past due account may help you. After taking into account your income, assets and other debts, the collector will offer you a settlement. If the settlement seems favorable for your situation, you can agree to it and your account is considered paid.

You can resolve the debt with one lump sum payment.

While payment plans may be available in some cases, most collection agencies would prefer to resolve the debt with a lump sum payment at the time of settlement. While it may require dipping into your savings or asking friend and family for help, the benefit of this option is that you would no longer owe any money to your creditor and you would be freed of the burden of dealing with collectors. If you have the means to do so, paying off your settlement in a single payment can save you a lot of headache later on.

You can avoid filing for bankruptcy.

If your financial situation looks bleak, you may find yourself faced with the possibility of filing for bankruptcy. A bankruptcy can give you a fresh start or help you structure paying back your creditors it can also impact your credit report and can remain on there anywhere from 7-10 years. While a debt settlement doesn’t leave your credit report squeaky clean as mentioned above, it is certainly easier to bounce back from financially. In the long run, pursuing a settlement can be less damaging to your credit and help you resolve your debt problems in a timely and efficient manner. For more information on your options for dealing with debt, go to the Federal Trade Commission.

You’ll have to pay taxes on your settlement.

Depending on the amount forgiven and whether it is made up of fees, and interest an amount that exceeds $600 may subject to your taxable income. This is something to keep in mind when deciding whether to negotiate a settlement with your collection agency. While you may be off the hook for your debt this year, you may need to make sure you plan for a tax expense that is to come in the following year. If you have questions or concerns please consult a tax advisor.

Your credit score may be negatively impacted.

While settling a debt may provide immediate financial relief, it may have additional consequences. A debt settlement may be reported on your credit report and this may be seen by future creditors. This potentially negative mark could make it more difficult to find lenders who are willing to work with you for future purchases.