Effect of the Important Time Frame for Debts
Receiving a settlement offer on debt that you cannot pay in full can be an ideal opportunity to deal with an old account. You can avoid the anxiety of starting the conversation with the creditor. Additionally, you do not need to convince the creditor of the settlement because they have already decided on it.
Beware of Fake Settlement Offers
It’s essential to be sure that the settlement offer you receive is legitimate before you pay or talk to anyone about the settlement (especially a debt collector).
Two Options for Accepting the Settlement Offer
If you receive a settlement offer and decide that you are interested, there are two ways you can respond. You can accept the settlement offer and pay the settlement amount in full. This is the easiest and quickest way to deal with the debt, provided that you have received a legitimate settlement offer. You should read the settlement offer carefully or have it reviewed by a lawyer to confirm that it is legally binding – that the creditor will not require you to pay the remaining balance at some future time.
You can also try to negotiate for a lower settlement. The creditor may be willing to accept a settlement that is less than what was offered in the letter. Since the door has already been opened to settling the debt, you can take advantage of this opportunity to see if the creditor is willing to accept a lower payment. You will have more bargaining power if you are able to pay the amount immediately.
If You Don’t Want to Settle
You do not have to accept the offer. The settlement offer may be too high, or you may not be interested in settling this debt at the moment. In either case, you do not have to respond to an offer you are not interested in taking.
As long as the debt remains unpaid, the creditor or their debt collectors may continue their collection efforts, including reporting the debt to your credit report if it is within the maximum trade reporting time. You can stop contact from third-party debt collectors by sending a written message to cease contact and collection.
Tax Implications of Accepting a Settlement Offer
Note that if more than $600 of debt is cancelled in the settlement, there will be some tax implications during tax season for the following year. You may receive a 1099-C debt cancellation form, which requires you to report the cancelled debt as income on your tax return. Make sure to include this notice along with other income and expense documentation when you visit your tax preparer.
Frequently Asked Questions (FAQs)
What is the percentage of the debt typically accepted in settlement?
The percentage of debt that can be settled varies depending on the amount of debt, its age, your income, and the creditor or debt settlement company. Debt settlement agreements typically range from 30% to 60% of the total amount owed, but there will also be significant fees on top of this amount.
How do you negotiate a debt settlement?
Just because you have determined that the debt is legitimate does not mean you have to accept the settlement offer without reservation. You can always negotiate, but you should be prepared and understand how debt negotiations work before trying. You may find more leverage in the age of your debt or your income. Remember that the collector is simply trying to collect as much of the debt as possible before the maximum time limit expires.
How long does the settlement remain on your credit report?
Generally, settled accounts remain on your credit report for seven years after the original delinquency date. Settling a debt may negatively impact your credit score, but not to the same extent as failing to pay the debt.
Source: https://www.thebalancemoney.com/respond-to-a-settlement-offer-from-a-creditor-960583
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