Debt settlement - good or bad idea?

by **ashbey15** » Mon Apr 04, 2011 3:46 pm

OK, few questions. If someone has say, 25k in debt - credit cards, the like – is it really possible to call the companies and negotiate a settlement for less than owed? And #2, how does this reflect on the credit report?

My brother in law is telling me that he is inheriting about 30 thousand bucks soon, and will be calling his creditors (credit card debt only) and negotiating with them, telling them that he has to file for bankruptcy and offer them less than owed. He SAYS he can negotiate and get them to about .30 cent on the dollar.

Is this correct? And how does it appear on the credit report? I don’t believe him. He says that he wants to keep as much cash as possible to open a business in a year or so. I say he will regret it because of the marks on his report. Who is right?

by **varik** » Mon Apr 04, 2011 3:57 pm

If these are current, active credit card accounts, it isn't likely that the banks will accept settlement for less than the full balance unless you have some kind of permanent change of finances, like medical disability. There are lots of debt settlement companies out there advertising how easy it is to settle credit cards, but they are pretty much all scams.

If you do get the credit card company to accept a settlement, it will be reported to the credit bureau as charge off/settled -- a huge negative. You will also get a 1099 for the forgiven portion and have to include it on your income tax return.

Oh, your brother-in-law may get a big surprise when he threatens to file bankruptcy. Most credit card companies will immediately sue if the account is even one month past due. They don't like playing games.

Now if this is charged off debt that is already in collections, by all means settle for as little as you can. Your credit is already damaged by the charge off.

by **arne33** » Mon Apr 04, 2011 4:09 pm

He is correct that they have been known to negotiate, but only in cases where the borrower is already failing to make payments.
It boils down to his willingness to trash his credit for years in exchange for a write down in debt. He may also have to pay taxes on any amount written off, so he'd better really think it through.

by **gall** » Mon Apr 04, 2011 4:17 pm

Good debt settlement or consolidation service
http://www.gooddebtsettlement.com

by **barend31** » Mon Apr 04, 2011 4:23 pm

If he is current, they probably won't budge. They have no incentive to settle.

Settling a debt is generally just an alternative to bankruptcy. The credit card companies are only willing to settle if the debtor is way behind in payments and they are in danger of getting nothing.

On a scale of 1-10 (with bankruptcy being a 10), settling your debt for less than you owe is about a 9.5.

As such, his plan has more than a few holes in it.

Trust me, the credit card companies have seen everything. My guess is they hear more than one bankruptcy bluff every day. They also know that the new bankruptcy laws favor them. My guess is that if he threatens to file bankruptcy, their reponse will be "go ahead".

by **colten** » Mon Apr 04, 2011 4:30 pm

Yes, he can negotiate for 30% of what he owes - IF he does it right.
Note: What they are taking off is fees, late payments and some interest - they will never go lower that the amount for the items you/he purchased.
He probably got a good book on Credit and Debt Repair and did his homework.

After the items have been paid off, his credit rating will slowly, very slowly start improving.
The items will show as "paid in full".
Better to have the items showing as paid.
He might need a major loan and they will review his reports.
Items showing paid will be much more favorable for him getting this loan.
Remember that major lenders don't worship the score - they worship the reports.
/

by **teyrnon72** » Mon Apr 04, 2011 4:36 pm

I did a debt settlement such as this a few years back. Yes it is possible to settle for .30 on the dollar. However; the caveat to this is that the difference between the amount owed and the amount settled for is considered income and will be taxed as such. This is where you get really screwed by doing this. The credit score only takes a hit for about a year. I had another credit card I owed on and just let it stay in limbo for four years. There is a statute of limitation in each state for debt collection. In my state it is four years. After four years of not answering the letters and the phone calls from the debt collectors they can no longer take me to court or sue me for that debt unless I make a payment or acknowledge in some way that I owe it. If I have the money one day I will pay what I owe them, but until then it is nice to know they cannot harrass me anymore.

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