Debt settlement involves negotiating arrangements whereby creditors agreed to take less than the full amount due in a lump-sum payment. This solution is very dangerous because you must become extremely delinquent on your debts in order to gain the leverage necessary to obtain significant settlements; even then, nobody can guarantee that a certain debt can negotiated, and if so, for how much. There is also no guarantee that a creditor won’t sue you before a negotiated settlement can be arranged.
Debt settlement affects how much you pay in taxes. If you owe $5,000 on a credit card and the amount is reduced to $2,500, the savings of $2,500 is considered taxable income to you and must be reported on your tax return. This means that you’ll have to pay taxes on the $2,500 savings, which may reduce your overall savings.
In addition, a 2005 report issued by the National Consumer Law Center entitled An Investigation of Debt Settlement Companies: An Unsettling Business for Consumers found that very few consumers ever complete a debt settlement program. The report shows that consumers continue to face collection efforts and their debts grow as creditors continue to pile on fees and interest charges. The report can be found by clicking on this link.
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