I talk to people everyday that tell me that a creditor has offered to settle their debt for less than what they owe. unfortunately these creditors rarely tell the whole truth about how much settling their debt will actually cost. When a creditor cancels a portion of a debt, they report the amount of the cancelled debt to the IRS as income. At the end of the year the person who thought that they had paid off the debt find that the cancelled debt has increased their income tax obligation.
In addition, settling a debt usually requires the person to pay the settlement amount in a lump sum. But while the debtor is saving to pay the lump sum, their other debts are still accruing interest and fees. By the time the debtor has saved the money to settle the first debt, their other debts have increased due to the interest and fees. Debt settlement may be a good option in some situations, but for most people it causes them to go further in debt.
Before deciding whether debt settlement is in your best interest, you should talk to a professional experienced in helping consumers resolve their financial difficulties. Debtors should carefully consider their options, including settlement of debt, filing bankruptcy, and reorganizing debts through refinancing existing debts or pursuing a short sale on their real estate.
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