It is true. Debt can be”negotiated” allowing a debtor to pay less than what is owed to a creditor.
However, there is no Federal or Arizona state law that forces a non tax related creditor to take less than what they are owed outside of the bankruptcy context.
Unfortunately, the belief that this may be true is being trumpeted by certain debt negotiation “professionals” on radio and TV.
This “pitch” may sound very appealing at first listen. To the honest debtor, with a sincere desire to pay back debt, these claims may sound like a godsend.
The key phrase to remember however is, “if it sounds to good to be true, it usually is”.
For those with serious credit card, medical bill, or business related debt who are trying to avoid bankruptcy or who have been told they don’t qualify for a chapter 7 and are trying to compare chapter 13 to negotiating debt, I am providing the following shortlist of debt negotiation pros and cons.
Debt Negotiation Pros
1. Debt is reduced – If you are able to negotiate successfully with the creditor, the amount you pay will be less than the amount you originally owe.
2. Budget – Putting together the funds to make reasonable offers to settle may require that you live on stricter budget than you may be used to. Good practice for avoiding debt in the future.
3. Simpler – Compared to filing a bankruptcy, saving money and settling with a creditor could be simpler.
Debt Negotiation Cons
1. Creditor Calls
If you begin to make payments monthly to a “debt settlement professional” you will likely continue to get collection calls. There is no legal method that prevents an original creditor from contacting a debtor except the automatic stay relief of a bankruptcy petition in Arizona.
Just because someone promises that the original creditors won’t call, doesn’t mean they won’t. Third party collectors are controlled by the Federal Fair Debt Collection Practices Act and can be stopped, by writing a short letter asking them to. You don’t need to hire someone to do that.
2. Credit Report
Most debtors do not have the funds handy to settle the debt with. This means that they must stop paying creditors in order to save the money necessary to settle and to convince the creditor that they are a “hardship” case that should be considered for settlement. While the money is being saved, the credit score is dropping.
3. Forgiven debt is taxable
Unless you fall under the IRS “insolvency” exception, you will have to treat the forgiven portion of the debt as income on your tax return. (Bankruptcy is the other exception).
4. No guarantee
If someone guarantees you a result, run…fast.