The Truth about Debt Settlement: Is it for you?

CHICAGO, Oct. 7, 2011 /PRNewswire-USNewswire/ -- Many people hear about friends or acquaintances that were relieved of credit card debt through debt settlement and think this might be the best solution to their payment problems. The Illinois CPA Society warns you need to fully understand debt settlement agreements before taking this serious financial step.  

How Does Debt Settlement Work?
Simply stated, debt settlement is an approach to debt reduction in which the debtor and the creditor agree on a reduced balance that will be regarded as payment in full. A credit company must have a solid reason to believe that you are actually unable to pay them before entering into a debt settlement agreement. Unfortunately, you prove this by not paying them which is an instant black mark on your credit score that doesn't go away for seven years. Once you've proven you can't pay them, you must negotiate a balance you can pay. The debt doesn't go away, it just gets lowered.

What are some of the Consequences of Debt Settlement?
In addition to having already hurt your credit score by non-payment, you must pay the negotiated balance immediately. Also, any debt that is forgiven is considered income – and you will have to pay taxes on that income.  

Are There Alternative Solutions?
You can call your credit card companies and ask them to reduce your rate. Point out that you've been a loyal customer who's paid on time in the past. If the first person you speak to isn't authorized to lower your rate, ask to speak to a supervisor.  Be persistent and assertive.

Also try to get rid of your payments faster by trying to pay more than the minimum; even $5 makes a difference.

How do you get on top of already large minimum payments?
Cut out extras to make it work and pay your credit balances down first – no more premium cable, expensive data packages on your phone or eating out too many lunches or dinners. What you save goes to paying your credit card.  Also consider selling through consignment shops or eBay things you bought but aren't using.  Look at your budget and lifestyle carefully to see where you're living outside of your means and identify where you can cut back.

Debt settlement is a serious decision with serious repercussions. It's important to think beyond your current situation. With debt settlement you'll have a black mark on your credit report that could keep you from any number of new things you'd like in the future – a house, apartment, job or car.

When in doubt on any important financial decision, turn to your CPA for help. Use the "Find a CPA" Directory on the Illinois CPA Society's site, www.icpas.org to locate a CPA in your area and for more money management tips follow @thriftitude on Twitter.

About the Illinois CPA Society
The Illinois CPA Society, founded in 1903, is the fourth largest state CPA Society in the nation, with more than 24,000 members. It is the premier professional organization that represents CPAs in Illinois. During its over 100 years of existence, the Society has advanced the highest ethical and financial standards of the profession, and has been a leader in educating the public on financial issues.

SOURCE Illinois CPA Society