What does Debt Negotiation mean?
Debt Negotiation is paying creditors less than what you owe. The creditor must agree in writing to the lesser amount. Typically this is accomplished either by lump sum or with a short payment plan. The shorter the payment plan, the better the terms. Debt negotiation can be most effective if the debtor is late paying, but not yet subject to a lawsuit or judgment. When the Creditor has already filed a suit, and/or received a judgment in their favor, there is little motivation on the part of the creditor to negotiate so the percentage of repayment would much higher if not the full amount. Always consult an attorney regarding this process.
The upside to Debt Negotiation
There is not a bankruptcy on your credit report which could enable the person who is liable for the debt to seek out subsequent loans without the required waiting time. Typically, if a bankruptcy shows on a credit report, and the Debtor wants to get a mortgage, depending on the type of mortgage, they may have to wait anywhere from 2 years to 8 years.
If the Debtor is trying to purchase a new car, then the waiting period is not as long, the lender will simply charge more interest.
The downside to Debt Negotiation
For every dollar over $600 that is forgiven, the creditor can send a 1099C, which is a tax form that can create tax liability. The underlining premise is that, since the creditor did not get paid the full amount, the amount that was forgiven would be considered income to the borrower (person originally owing the debt) and therefore would have to pay income tax on that amount. We always suggest speaking to a tax professional with regards to tax issues.