From the category archives:

Debt

Soon after the Standard & Poor’s downgraded the top notch credit rating of the US and cut it by one notch (AA+), there have been grueling discussions about the impact of this harsh decision on the investor’s market. Though there were predictions of a rise in the interest rates on personal loans, there are still no signs of any drastic change in the rates. However, the debtors have already gone through a scary erosion of confidence and this has made them rush towards debt settlement firms as this is the only way in which they can repay their debts without even having to pay back the entire amount.

If this is such a famous option, then why do the financial experts advise against it? They say that debt settlement should always be avoided unless there is no other option but to file bankruptcy as this leaves a huge mark on your credit score and the taxes that you pay on the forgiven amount may offset any kind of savings that you may obtain through the debt settlement. A less drastic measure such as a debt management plan through a credit counseling agency can be a better option to resolve your debt dilemma but when you have no other option but to go for settling your debts, you must educate yourself on some dos and don’ts.

  • Don’t wait and be proactive: When your payments are behind by at least 6 months, your accounts tend to be charged off. Don’t wait until this moment comes. In real, a charged off account is the term that is used by a creditor when the chances of recuperating the money from the debtor is slim. If you want to contact your creditors and alter the repayment term, this is the time. Don’t delay as this may start hitting your credit score. As long as your debt account is not written off, you can certainly settle the debt and free yourself of the bondage of debt.
  • Don’t neglect the consequences: Any settlement for which the forgiven amount by the creditor is more than $600 becomes taxable. For instance, if a debtor was to settle a $10,000 for $6,000, the $4000 amount becomes subject to tax under the IRS. Apart from the tax consequences, this option also has a tough impact on your credit score and your future ability to borrow new lines of credit is also jeopardized.
  • Do prepare yourself to show the financial cards: Before your creditors agree to settle your debts, they will ask you for documentation of income, assets and all your existing debt accounts. The motive behind this is to ensure that the debtor is actually going to repay the debt after it is settled or he is just planning to save his bucks through the particular concession that is being done by the creditor.
  • Don’t make a promise that you can’t abide by: If your creditor is letting you pay back the amount over a stipulated period of time, make sure you set the payments at a level that can be managed effortlessly. Don’t set up an unrealistic plan. Not being able to make the payments even after the debts are settled will portray a bad reputation.

Your creditors are required by law to report your debt settlement payments to the credit bureaus and your task should be to cross-check whether or not the payments are accordingly reported to the credit rating agencies. Ensure that the debt collection agents stop contacting you once you’ve repaid your debts in full.

Author Bio: Jack is a financial writer and enjoys writing articles on the global financial situation, making money online, the stock market, debt consolidation, and mortgages along with other finance-related topics. He is also associated with some online financial communities like http://www.twitter.com/debtcc.

 

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