Settling Debt

Settling Debt

By Keith Bunn Jr.

June 9, 2013

Good morning everyone,

This week I'd like to talk about settling debt. This is different than using a debt settlement organization, which I don't recommend by the way. I'm talking about you calling up a creditor/collector and asking them if they will take less money than you owe to settle the debt once and for all.

The Do's and Don'ts of Settling

First off, I don't recommend settling on any debts if you have the money to pay them off. You signed up for the ride, now it is your obligation to finish it. But when you don't have the money to pay on the debt and you haven't paid on it for some time, you maybe able to settle on that debt for sometimes a quarter to a dime on the dollar. 

Now put yourself in the creditor's/collector's shoes for a bit. The only reason a creditor/collector will take less than what is owed is if they think they're not going to get anything at all, so if you are current with them, they won't settle. 

The first thing you must do is get on a budget. Give every dollar a name and stick to that plan. Part of that plan will be to save up some money so you can call up your creditors/collectors to try to settle with them. Once you have good portion of money saved up, call them up and offer it to them. Now they may or may not take your offer. They may even counter your offer, but if all you have, is all you have, don't agree on something you don't have, and tell them that, "Mr./Mrs. Jones, I don't have that much money right now, all I have is "this". I have a list of creditors/collectors that I can call to offer "this" to. If you don't want to take "this" as settlement, I'm sure one of them will. Are you sure you don't want to take it? No? OK Mr./Mrs. Jones, I will call you back in about a month or so when I have saved up some more money. Have a great day." and then hang up the phone. If they are not going to take your offer there is no sense dragging the conversation out. Just hang up, call the next creditor/collector on your list you want to settle with and offer them what you have. Keep doing that until someone takes your offer, and call all the others back when you have saved up some money again. Now in order for this to work, you have to have a reasonable offer. If you owe $5,000, don't offer them $100. That would just be insulting.

If They Take Your Offer

If you find a creditor/collector that will take your offer, ALWAYS, ALWAYS, ALWAYS get the settlement agreement in writing. If you don't have proof that the debt was settled, it wasn't settled. Once you have an e-mail, fax, or letter that has the creditor's collector's letterhead on it that says they will take "X" amount from you as "settlement in full" on your debt, then you can send them an over night check for the amount you agreed on. Once that is done, you need to staple the check stub to the letter you got from the creditor/collector as proof that the debt was settled and keep it for the rest of your life. Because this may come back and try to bite you in the butt again, and if you don't have proof you settled the debt, you will have to start paying on it again. This happened to us twice and all I can say is that I'm glad my wife is as organized as she is. She knew right where those papers were and sent them copies proving we had settled the debt.

Now there are some "never's" when it comes to settling debts. Never give any money to the creditor/collector until you have the settlement in writing. Never send the creditor/collector money with a check over the phone or electronically. That's a good way for the creditor/collector to clean out your account.

Taxes

There is one more thing you need to know. Settled debts are taxable. If you owed $5,000 and you settled it for $2,500, the remaining portion of the debt is considered income and is taxable and you may get a 1099 from the creditor/collector stating that. But don't freak out about that. If you are in a 25% tax bracket, you will only have to owe $625 in taxes for the remaining $2,500. I don't know about you, but I'd rather pay $625 than $2,500, wouldn't you?

Question

1) Have you ever considered settling on a debt before?

The reason I do this is to give people hope and to try to inspire others. To make them think about their finances, whether they are young or old, so they can win financially.

If you have any questions for me about my posts or about your finances, you can call me at (616) 454-2046 or e-mail me at cavuscoaching@gmail.com. You can also find more money news, facts and ideas, on my Facebook and/or Twitter pages. I'd be grateful if you followed me. Thank you!