ICFE eNEWS #17-11 - March 7th 2017
10 Things You Should Know About Debt Settlement
By Jim Garnett, a/k/a Ask Mr.G, a member of the ICFE's Board of Educational Advisors
Question: I hear ads all the time about how I can "pay off my
debt for pennies on the dollar" through debt settlement. Can you
explain what this is?"
Answer: Certainly. Here are 10 things
you should know about the debt settlement process:
- Debt settlement is the process of paying off debt to a
creditor after mutually agreeing to a sum less than what is
owed. The type of debts involved would be unsecured debts that
have not been paid for at least 180 days and are designated on
the credit report as a "R9" (Revolving charge-off) or a "RI"
(Installment charge-off). Often these debts have been sold to a
collection agency because the original creditor deemed them
- The rule of thumb is "the older the
debt, the better chance of negotiating a smaller payoff. Start
negotiations at 25-30%, but expect a realistic agreement to be
somewhere between 40-75%. Since full payment on the agreed
amount is due in one lump sum, be sure to have the full amount
in hand before making any deal. They will not take payments.
- SEND NO MONEY UNTIL you have received all agreements in
writing, including (1) a receipt for your payment, plus (2) the
creditor's promise to report the transaction accurately to the
three credit bureaus.
- Do not pay with post-dated
checks because they can legally be deposited early and often
- Be aware of tax liabilities. The first $600 you
save is exempt from taxation, but after that, the creditor must
report the rest of the savings as "1099 Miscellaneous Income,"
and you may be required to pay income tax on it. Consider this
tax liability in the overall amount of what you will actually
save by settling.
- Keep all the paperwork about your
settlement agreement for validation in case there is any
misunderstanding or error down the road.
- After making
payment, wait 3 months and pull your credit report to make sure
the transaction has been reported properly. The new balance
should read "0" with the notation "Paid Settlement." If you find
a balance still owing (which often is the case), dispute the
balance by sending a copy of your settlement agreement to each
of the three credit bureaus asking them to correct it. Wait
another 60 days, then pull another report to make sure it is
corrected. Be persistent until they get it right. It does not
hurt your credit to pull your own report.
that debt settlement does not improve your credit score as much
as paying it in full. Also understand that settling just one or
two debts out of many also will not greatly improve your credit
score, especially if after settling, you are sued by another
- Some credit reports will tell you the date
each debt is due to drop off your credit report, usually 7 years
from the date of delinquency. Practically, it may be better to
leave those debts about to drop off unpaid.
- I would
steer clear of debt settlement companies, primarily because if
you do a little "homework," there is nothing they can do for you
that you cannot do for yourself. For instance, they cannot stop
judgments or garnishments even though many claim they can.
© Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023
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Paul S. Richard
President - Executive Director
IInstitute of Consumer Financial Education (ICFE)
About the ICFE:
The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation). The ICFE is dedicated to helping consumers of all ages to improve their spending, increase savings and use credit more wisely.
The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its education programs and Resources. It publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.
The ICFE became an official partner with the Department of Defense/Financial Readiness Campaign in June of 2004.The ICFE was an active partner in the California Student Debt Resource Awareness Project (CASDRAP) which resulted in a new web site: (studentdebthelp.org). CASDRAP disbanded in 2010, shortly after the web site project was completed. In 2011 the ICFE assumed the single sponsorship of the (studentdebthelp.org) web site and is now responsible for its content and operation.
The ICFE is also an on-line help for consumers who spend too much. ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.
Visit the ICFE's other web sites at: www.financial-education-icfe.org and studentdebthelp.org. Both sites helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G, a free eNews, and an online resource center for students, parents and educators, plus financial education learning tools and a book store.