Personal Loans and Debt Settlement

[Jan 8, 2010.]

 

Consumers who are struggling with debt may find some relief with a debt settlement plan. But it's important to understand how debt settlement can impact your financial situation. Use the following tips to decide if debt settlement can help you pay off a personal loan or credit cards.

Not Everyone Qualifies

Just because someone doesn't want to make payments on a personal loan doesn't mean they can qualify for a debt settlement plan. Generally, lenders are only willing to discuss settling a loan if a borrower is experiencing a serious financial hardship. Some factors that may convince a creditor to settle a loan are a job layoff, major illness, or possibility of foreclosure.

Loan Negotiations

Most people don't need to hire a debt settlement firm to negotiate paying off personal loans. In fact, some creditors prefer to deal directly with borrowers. That's because debt settlement firms often tell clients to stop paying on bills while they work to accumulate enough money for a payoff. Borrowers who stop paying their bills, as instructed by a debt settlement firm, could get hit with a lawsuit.

While attempting to settle loans on your own, be prepared to make several calls to lenders and document all conversations and correspondence. Also be prepared for a wait, since so many folks who are struggling with loans and other bills have the same idea about settling debt, and lenders may be overwhelmed trying to handle all the cases.

Personal Loan Payoff

If you have a lump sum of cash saved up, you may be in a good position to get approved for debt settlement. Some creditors are willing to accept a portion of the outstanding balance of a loan (often 40% to 60%) instead of having to write off the entire debt and recover nothing. In some cases, you may be able to set up new, more affordable monthly payments on a personal loan.

Paying Fees to Debt Settlement Firms

Some people may not be confident about their negotiating skills and may choose to use a debt settlement firm or attorney to deal with loans. Using a debt settlement company involves various fees that can amount to thousands of dollars, in some cases. It's not uncommon for debt settlement firms to charge up to 35% of the settlement amount, according to SmartMoney.

Taking a Tax Hit

Whether you choose to settle loan debt on your own or with the help of an agency, you must understand the tax ramifications. The amount of any forgiven debt must be claimed as income on your tax return.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.