Debt Negotiation vs. Debt Settlement: Which to Choose

Debt negotiation is the process by which you and your representatives negotiate with your creditors for lower monthly payments. Debt settlement, on the other hand, typically represents a one-time payoff for a percentage of the total principal owed. The two terms are often used together or interchangeably, but there are a few key differences that make one option better than the other for each debtor. When collections agencies are calling, you may be pressured into making a hasty decision. Carefully consider the short and long-term effects of a debt management option prior to signing a contract.

When to Choose Debt Negotiation

Debt negotiation is an excellent option for those individuals who are receiving a regular income but cannot make ends meet with their current monthly payments. By reducing the amount owed each month, these people may be able to continually make payments on time. This option can save your credit score. If you are not too far behind on payments, this is typically the correct option for you. It may be especially beneficial if you owe more than one creditor. By simply reducing each monthly fee by a small amount you will be more able to make those multiple payments. The biggest mistake people make in debt negotiation, however, is to continue the pattern of spending that led them to the problem in the first place. Take a hard look at your monthly budget to determine what you can afford. Cut spending and make your payments a priority each month to avoid settlement or bankruptcy.

When to Choose Debt Settlement

Debt settlement may be a better option for those borrowers who have lost a source of income, missed payments for more than three months or have substantial financial debt. You can start with a clean slate by choosing debt settlement. However, you will need to have the lump sum payment available immediately. If you are facing Chapter 7, it is likely you do not have substantial assets to put down against your liabilities. This situation means you will not likely have the sum required to settle your debts. Additionally, whatever reduction of debt you receive will be a taxable income according to the IRS. For example, if you settle $10,000 worth of credit card debt for $6,000, the $4,000 you wrote off with the debtor will be taxed. 

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