Debt Settlement: Learn How To Do It Yourself

Debt settlement involves settling your debt for less than what you owe. Debt settlement can be done with the help of an attorney or a credit counseling service, but it can also be done on your own. However, before learning how to do debt settlement yourself, it is important to understand how it works, what is involved in the process and what the implications are.

How Does Debt Settlement Work

Debt settlement involves negotiating with your creditors to pay back less than the full amount you owe. It is often considered a better alternative to bankruptcy for both you and the lender since the lender gets paid back some of his money and you don't have to declare bankruptcy. For those considering Chapter 13 bankruptcy especially, debt settlement makes sense when possible since a Chapter 13 bankruptcy would require you to pay back some of your debts under a payment plan anyway.

Consequences

Settling debt is not without consequences. Your credit will be hurt during the process, both because of late payments (your payment history accounts for 35 percent of your credit score) and because of the fact that your credit report will show the accounts as "Settled" rather than as "Paid in Full." Most credit card companies and creditors will also close your account after you settle, which will hurt the average age of your credit history (worth 15 percent of your credit score) and your credit utilization (worth 30 percent of your credit score).

In addition, you may have to pay taxes on the portion of debt that is forgiven. In some cases, this can result in a large tax bill. This can also increase the IRS classification of your income, potentially pushing you to the next tax bracket.

How to Settle Debt Yourself

To settle debt yourself, you first have to stop paying your credit cards. Most creditors will not settle debt unless you are behind on payments. After all, if they are getting paid every month, what incentive do they have to accept less. You will be getting calls from creditors during this time, so know you rights under the Fair Debt Collection Practices Act.

Once you are between 3-6 months late on your payments, it is time to talk to creditors about settling for less. Speak to a supervisor or a person in charge, or send a registered letter asking to settle your debt for less and making them an offer for the amount you want to settle for. Most creditors are more receptive to doing this if you make them a lump sum one time cash offer, so you should be saving the money you would have sent to make payments for this purpose. Some will accept a payment plan for a reduced amount of what is owed, but this is generally not as attractive an option.

You will want to ensure you get everything in writing regarding the debt settlement plan before you send the money. Make sure the plan specifies that the payment will be payment in full.

Although it is possible to do this yourself, you want to ensure your legal rights are protected and that the debt will actually be settled for less, so it is a good idea to consult with an experienced debt settlement attorney to guide you through the process.

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