Know Your Options Before Considering Debt Negotiation
Debt negotiation should be considered a last-resort measure before bankruptcy. A lender has little motivation to accept a pay off for less than the full amount unless the debtor is already months behind on bills. Debt negotiation, also sometimes called debt settlement or debt arbitration, is best reserved for use when debt is seriously delinquent. If you’re considering debt negotiation, it’s important to be informed about all the options available to help you deal with your debt.
Contacting creditors on your own, negotiating payment arrangements, asking permission to skip a payment, or asking for a lower interest rate are simple measures you can take as a first step to manage your debt. Don’t consider any other course of action until you’ve tried these options.
If you have a substantial amount of debt, a qualified credit counseling service may be able to help you reduce payments and prevent further damage to your credit report. Although credit counseling can provide consumers with valuable assistance, some firms exist only to cheat their vulnerable clients. These companies use their non-profit status to attract customers who are then tricked into paying large fees. Those fees are sometimes funneled to for-profit companies. Recently, the FTC and IRS issued the following tips for choosing a credit counseling organization.
* Pay careful attention to the fees an agency charges, the nature of the services it offers, and the terms of the contract
* Make sure that creditors are willing to work with the agency the you plan to choose
* Consider using agencies that offer actual counseling and education, instead of simply enrolling all clients in a debt management program
Another option for consumers overwhelmed by debt is to consolidate debt by establishing a new loan with lower monthly payments. A debt consolidation loan helps manage your debt because the loan is usually over a longer period of time and possibly at lower interest than your existing debt. Consolidation should be used when debts are mostly current.
While there are many options to help a consumer cope with unmanageable debt, sometimes debt negotiation may be the only appropriate course of action remaining. For example, debt negotiation would be a good course of action if a long-forgotten debt is the only blemish on your credit report. However, you may owe income tax on the debt owed. Any forgiven debts of $600 or more are considered income to the consumer. The creditor will send you and the IRS a Form 1099-C at the end of the tax year.
As a general safety precaution, anyone who plans on using a third party to handle their finances should remember to check them out with the Better Business Bureau and State Attorney General's Office of Consumer Protection. These agencies keep records of credit repair services that have mislead their customers about the impact the service would have on their credit rating, the fees involved, and the possibility of legal action from the creditors.
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