Debt Settlement - Important Facts to Consider

We have all heard them - those catchy radio ads that call to the vast majority of Americans who have found themselves either unemployed, robbing from Peter to pay Paul or as a home owner who got caught in the sub-prime lending trap in the real estate market demise who could no longer qualify to refinance their loans, and weren't able to afford the new payments on their ballooned interest rate loans.

What ever the case might be, debt has become a way a life for most and due to the Bankruptcy reform in 2005 which made it nearly impossible to walk away from the obligations of racked up credit cards; many people now find themselves struggling and way over their heads in debt.

Advertisers are aggressively targeting those individuals who are sitting with outstanding debts with limited means to cover them. "Are you $10,000 or more in debt? Are you past due or about to be? Let us help you! We can reduce the amount you owe and help you settle your debts with creditors, saving you thousands!" Sound familiar?

The all too good to be true!

Yes it is true! In some cases you can settle on unpaid debts with your creditors, often times reducing the outstanding balances. As a rule, most credit card companies won't entertain discussing a settlement with you, if your accounts are current. Sadly, these talks are often times limited to individuals who are three to six months past due. Why you ask? Because it seems you can't get help before a problem exists, so when you find yourself in default with your creditors and they chance losing money too, they are much more willing to negotiate terms.

The reality here though is that there is a price to pay. Aside from the fact that you will have a sub-standard credit score to deal with, these debt settlement companies know that in order to settle your debt, you need to have the funds to pay the agreed upon amount upfront. No credit card company is going to agree to accept 50% of the balance you owe and allow you to make monthly payments. This is where these companies paying for radio ads come in! They will front the money for you, but remember no one gets anything for free. They will make the arrangements with the companies on your behalf, and arrange to settle the debt for a fraction of the outstanding balance, but you are now indebted to them. Not to mention the fees they impose for helping you. It's a vicious cycle.

Don't be too quick to jump into what appears to be the fast and easy, quick fix! Did you know that even if you settle your debt, your responsibility and obligation doesn't end there?

Your debts have been settled, no more harassing phone calls, no more collections letters. You can finally exhale, or can you? Out of the blue, you receive a notice from the IRS for unreported income! What is this, you ask? The settled or forgiven debt has now been turned over to Uncle Sam, as creditors are required to submit a 1099 to the IRS reporting any cancelled balance amount that exceeds $599.00. This amount my friends, becomes taxable income and you are required to report this "forgiven" amount as income, and are responsible for paying tax on that income.

There are some key things to keep in mind, when you find yourself in debt, unable to make your payments and the phone calls keep coming.

1) Don't avoid a creditor's phone call-they will keep calling!

2) Don't make a promise to send a payment, or tell them that a payment was sent, if it wasn't-that only prolongs the inevitable, and reduces their willingness to work with you.

3) Be honest and explain your situation, and what you are realistically able to pay!

4) If you promise to make a payment, follow through and make it.

5) Remember when you call in, you are being connected with a customer service representative or collector. Their job is to collect!

6) Ask to speak with a supervisor or someone who is able to work with you in making arrangements. You might hear "there is nothing that can be done" a few times, before you actually make contact with someone who can offer you alternative solutions, so don't give up or become discouraged.

7) Be proactive. If you know that you are having difficulties, take responsibility and initiate communication with them. Waiting until they call you, only adds to the stress and uneasy feelings this circumstance already presents.

In this recession, as we are faced with economic uncertainty, you must come to realistic terms with your own personal situations. Do not feel isolated or embarrassed. Remember, you are not alone! We all tend to revert our thinking back to hearing our parents tell us that there are consequences to face, because of our actions. So we end up with bad credit for seven years. So we won't be able to qualify for another credit card. Is that really a bad thing? Isn't that darn credit card the root of our evil anyway?

We have to take from each experience in our lives and learn from it. Be careful not to repeat the same lessons over and over again and focus on the positive things to come.

And always remember, this too shall pass!