Debt Relief Debt Relief

Traditional Debt Relief Strategies

DIY Debt Settlement

According to Generally Accepted Accounting Principles (GAAP), if a consumer has not made a payment on a debt for six months (technically 180 days), the original creditor generally records the debt as a loss, gets a tax deduction, collects any insurance money they have in place against bad debts, and may sell your account to a debt-buyer.

Before the 180 days is up, the original creditor will probably offer you a settlement. Should you take it? I can't answer that question for you. Just keep in mind the credit card company's settlement offer may be as high as 70%-80% of the original debt; if they are negotiating near the end of the six-month period, they may go as low as 40% in some cases, but quite frankly, that kind of offer is unlikely. Credit card companies can discharge the debt and get a 20-30% tax write-off, and may receive insurance payments and be able to sell it for 8-12 cents on the dollar. As a result, they won't offer to settle for less than what they could otherwise receive. If you want to pay as little as possible to settle the debt, you stand a much better chance dealing with a debt-buyer, who has a lot less invested in the account.

Why would the credit card company (original creditor) decide to sell your account rather than continuing to try debt collection? Currently, credit card companies are discharging over 100,000 accounts a month each, and that number continues to grow. Some individual credit card companies discharge over 1,000,000 accounts each month!

That's just too many accounts for a credit card company to deal with—they are in the lending business, not the debt collection business. And the playing field is tilted in the credit card company's favor, anyway. They figure they have probably already made a nice return on those accounts, so they sell the debt to a debt collector and call it quits.

A debt collector will purchase your debt for, at most, 15 cents on the dollar from the original creditor. They might try debt collection for 6 months or a year. If they sell it to another debt collector, it will likely be for around 5 cents on the dollar. The longer your debt has been around, the less it is worth and the less they will settle for.

(If you want to try settling your accounts on your own, refer to the tutorial on debt settlement in the Roadmap section.)

In closing, here are the pros and cons of debt negotiation and settlement to consider:

  • Pro: Accredited debt settlement companies leverage professionals and large portfolios to work for you, giving you a much stronger negotiating position.
  • Pro: You'll likely pay back less than what you owe and you'll do it on a budget that you control.
  • Pro: Once a debt settlement has been reached, you are done!
  • Pro: You can usually have your credit report updated to "paid as agreed."
  • Con: Collections efforts WILL continue. You owe the debt, and collectors will still try to get you to pay them directly.
  • Con: Your credit score will be negatively impacted. Getting new credit will be really tough and expensive while in a program.
  • Con: You may have to pay taxes on the difference between what you owe and what you settle for.


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