Debt Settlement Issues

Settlement can bring issues.debt defined image by Christopher Walker from Fotolia.com

The average credit card debt for each American family is over $15,000, according to creditcards.com. They go on to say that the total amount of America's consumer debt is $2.44 trillion dollars and rising. The effects of this level of spending are starting to show. Moneycentral.msn.com states that 43 percent of all Americans spend more than they earn on an annual basis. They also state that the number of bankruptcies has nearly doubled in the last decade. With rising debt many have looked to debt settlement as an option.

Debt Settlement Isn't Right for Everyone

Debt settlement companies are likely to encourage you to take settlement as an option. In truth it may not be the best option for your financial situation. Debt settlement works best for people who cannot pay their creditors the full amount but cannot qualify for chapter 7 bankruptcy. A debt management program might be a better option. You may be able to negotiate a lower interest rate and payment with your creditors. It will take time but eventually you will pay down your debt.

Debt settlement will damage your credit score especially if you settle for substantially less than the original amount owed. According to moneycentral.msn.com, creditors generally only negotiate a settlement when you are already behind in payments. Your credit score is already damaged and settlement can push it down further.

Debt settlement does not mean that the issue has ended. Creditors can still legally sue you for the remaining balance of the debt. Debt settlement does not carry the same protection as bankruptcy, where creditors must stop all collection activities as soon as it has been filed. Even if you notify your creditors on your efforts to settle the debt, they still have the right to take legal action against you.

There are certain debts that are exempt from settlement. Your utility bills, student loans, taxes, child support, alimony and secured debts are not allowed to be considered in debt management. If you are experiencing financial difficulty in paying these commitments then contacting the institution directly is the best way to learn of alternatives.

Debt settlement can be considered taxable income. The IRS considers any amount of forgiven debt over $600 to be income and therefore subject to taxes. For example if you have had $10,000 in forgiven taxes and your rate is 15 percent , then you will end up owing the IRS $1,500. This is also debt that cannot be forgiven or settled.