Debt Negotiation: Is It For You?

Finding debt relief through debt negotiation can seem very appealing at the outset. However, before deciding on this option, it is important to understand the pros and cons of the process of negotiating credit card debt.

Several third party debt settlement companies will do the debt negotiation for you. The first step in their process is to have you stop paying on your debt. Instead they will have you make those same payments (or whatever amount you can afford that they have worked out with you) into a trust account for accumulation. Once the balance in that account has reached at least 25 to 50 percent of your debt owed they will begin the negotiation. Once a settlement is reached (typically much less than you initially owed) the settlement company will pay your creditors one payment in full.

Not everyone will benefit from debt negotiation. Everyone circumstances are different and so they should thoughtfully reviewed before a course of action is set. First of all you have to be at least 3 months in arrears in order to be considered for this program. Second, it will sting your credit because you will be forgiven some of your debt. And last, you will most likely receive a 1099 form at the end of the year with the amount of the forgiven debt and have to pay taxes as if you made that money. However, for a person that is facing bankruptcy as the other option, this is a far better plan. Also, it will help with stress, because a settlement company will be screening all the calls from your creditors instead of you.

Debt negotiation has a downside. First, it costs a lot to hire a company to do the work for you. The going rate is about 20% of the debt you are forgiven. So if you owe $10,000 and are forgiven $5,000 you will have to pay the company $1,000 to negotiate the debt for you, and sometimes they want a portion of it up front. If you do it yourself, you will have to take a lot of time and keep your head on straight and don’t let your emotions get in the way. Second, you have to stop making payments to your creditor which will make them mad so you may start getting some nasty phone calls. Third, you will owe taxes on the forgiven amount. And last, it will damage your credit some.

Weigh the options carefully and then decide whether debt negotiation is right for you.

When is negotiating debts a good idea. How to make the most of a bad situation.