ICFE eNEWS #17-11 - March 7th 2017
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Question: I hear ads all the time about how I can "pay off my debt for
pennies on the dollar" through debt settlement. Can you explain what
Answer: Certainly. Here are 10 things you should know about the debt settlement process:
1. Debt settlement is the process of paying off debt to a creditor after mutually agreeing to a sum less than what is owed. The type of debts involved would be unsecured debts that have not been paid for at least 180 days and are designated on the credit report as a "R9" (Revolving charge-off) or a "RI" (Installment charge-off). Often these debts have been sold to a collection agency because the original creditor deemed them uncollectable.
2. The rule of thumb is "the older the debt, the better chance of negotiating a smaller payoff. Start negotiations at 25-30%, but expect a realistic agreement to be somewhere between 40-75%. Since full payment on the agreed amount is due in one lump sum, be sure to have the full amount in hand before making any deal. They will not take payments.
3. SEND NO MONEY UNTIL you have received all agreements in writing, including (1) a receipt for your payment, plus (2) the creditor's promise to report the transaction accurately to the three credit bureaus.
4. Do not pay with post-dated checks because they can legally be deposited early and often are.
5. Be aware of tax liabilities. The first $600 you save is exempt from taxation, but after that, the creditor must report the rest of the savings as "1099 Miscellaneous Income," and you may be required to pay income tax on it. Consider this tax liability in the overall amount of what you will actually save by settling.
6. Keep all the paperwork about your settlement agreement for validation in case there is any misunderstanding or error down the road.
7. After making payment, wait 3 months and pull your credit report to make sure the transaction has been reported properly. The new balance should read "0" with the notation "Paid Settlement." If you find a balance still owing (which often is the case), dispute the balance by sending a copy of your settlement agreement to each of the three credit bureaus asking them to correct it. Wait another 60 days, then pull another report to make sure it is corrected. Be persistent until they get it right. It does not hurt your credit to pull your own report.
8. Understand, that debt settlement does not improve your credit score as much as paying it in full. Also understand that settling just one or two debts out of many also will not greatly improve your credit score, especially if after settling, you are sued by another creditor.
9. Some credit reports will tell you the date each debt is due to drop off your credit report, usually 7 years from the date of delinquency. Practically, it may be better to leave those debts about to drop off unpaid.
10. I would steer clear of debt settlement companies, primarily because if you do a little "homework," there is nothing they can do for you that you cannot do for yourself. For instance, they cannot stop judgments or garnishments even though many claim they can.
© Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023
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