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The Realities of Debt Settlement

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The debt settlement industry witnessed unprecedented growth in the 2000s, both to its benefit and detriment. Many people who availed themselves of the service didn’t really understand what it’s all about. It’s important to recognize the success of debt settlement depends on your financial circumstance and the debt settlement company you are dealing with. With that in mind, here are some of the realities of debt settlement you need to know. 

You Can Be Sued Before You Settle Your Debts

Your creditor can sue you before you clear your debt. Being sued isn’t a simple matter because it puts you into an awkward financial position. When sued and the judgment goes against you, you’ll have very limited options. 

The only ways you can survive a judgment are by:

  • Paying (satisfying) the judgment fully
  • Proving that you are too poor that the creditor considers you judgment proof. You must prove that your income is minimal, you survive on state benefits, you have no assets/property or your bank account is empty.
  • Filing for bankruptcy. However, doing so will stay on your credit report for 10 years.

Your Credit Report Will Reflect the Settlement

When you agree with your creditor to clear your debt by paying less than what you owe, the creditor will report you (your account) for settling your loan with less than what you owed. This will affect your account for seven years because it will appear in your credit report.

A delinquent account is more hurting than most actions on your credit report, excluding accounting closure for non-payment, foreclosure, or bankruptcy. A settlement appearing on your report will make your credit score drop by not less than 10%, depending on your past payment history and current credit rating. On the other hand, if you need debt settlement, odds are your credit score is already less than optimal. This puts you in a position to begin rebuilding your good name. 

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Your Tax Liability Might Increase

When you clear your loan through debt settlement, the IRS considered that you spent money that you now won’t pay. In the eyes of the IRS, that money you spent counts as an income, and has to be taxed.

In fact, at the end of the year, your creditor will send you Form 1099-C if the amount forgiven is $600 or more. Even if you are forgiven a smaller amount, the IRS expects it to appear in your tax return under “other income.” You can find more about this from the many online National Debt Relief reviews.

There’s No Law Protecting You Against Paying Your Debts

You don’t have any right not to pay what you owe. Some debt settlement companies may lie to you that you are safe even if you don’t pay your loan, claiming that there are some laws that protect you. Such laws don’t exist. If you fail to pay your loans, you’ll face all the consequences. You can be sued and have your assets seized. So, before you stop paying your loans, think about the risks you are exposing yourself to. 

You Can Negotiate Debt Settlement On Your Own

A debt settlement company will not tell you that you can negotiate a settlement with your creditors on your own. However, it’s a very arduous task rife with obfuscation, frustration and anxiety. With that said, one of the realities of debt settlement is you can do it If you are persistent and confident and willing to put in the time.

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