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Who Qualifies for Debt Settlement?

Patrick Austin, J.D. | April 13, 2023

Patrick Austin
Attorney from George Mason
Patrick Austin, JD

Patrick Austin is a licensed attorney with a background in data privacy and information security law. Patrick received his law degree at George Mason University's Antonin Scalia Law School, where he served as the Editor-in-Chief for the National Security Law Journal.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

If you are experiencing financial hardship, you may qualify for debt settlement.

Summary: If you are considering debt settlement as a way to reduce or eliminate an ever-growing credit card balance, an important question needs to be answered: Do you even qualify for debt settlement? Generally, debt settlement is only an option for someone who can provide evidence of financial hardship or who has defaulted on their debt. Keep reading to learn more.

People struggling with a significant amount of credit card debt, medical debt, and other forms of consumer debt may be contemplating signing up for a debt settlement program or possibly attempting to negotiate a debt settlement on their own with creditors. However, there is a prerequisite that needs to be addressed before considering different debt settlement programs, strategies and techniques.

Do you qualify for debt settlement? This article offers insights that can help answer this important question.

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Before taking a deep dive into the qualifications for debt settlement, let’s go over some basics:

Debt settlement explained

Debt settlement, particularly credit card debt settlement, is basically shorthand for when someone reaches an agreement with their creditor, or creditors, to make a lump sum payment covering a percentage of their current debt balance, along with fees and finance charges, in exchange for a portion of the debt balance being wiped away and, ultimately, a reduced monthly payment.

You can pursue debt settlement for the following types of debt:

  • Credit card debt
  • Medical debt
  • Department store card debt

How debt settlement typically works

There are basically two types of debt settlement:

  1. Self-directed debt settlement negotiations
  2. Company-directed debt settlement

If you opt for self-directed debt settlement, here is how it typically works:

  • You approach your creditor, or creditors, with a partial payment offer. Typically, the partial payment offer will range anywhere between 30 percent and 80 percent of the total amount owed. You then ask for the remaining balance to be written off.
  • The creditor will review your proposal and either accept, reject, or counter the offer.
  • If the creditor makes a counter offer, you can engage in negotiations to try and reach a middle ground on an amicable settlement.
  • Once a debt settlement agreement is reached, you should receive a document memorializing the terms.
  • You will then be required to make the aforementioned lump-sum payment within a specified timeframe (typically between 30 and 60 days).
  • Going forward, you should see a reduced debt balance and lower monthly payment obligations.

SoloSettle makes self-directed debt settlement simple. Our software sends and receives settlement offers until an agreement is reached, helps you manage the agreement documentation, and transfers your settlement payment so you can keep your financial information secure and private.

Watch this video to learn more about how to settle a debt on your own, once and for all:

Now that we’ve covered some of the basics concerning debt settlement, let’s talk about who qualifies for debt settlement.

Financial hardship may be required for debt settlement

First and foremost, credit card debt settlement is typically only a realistic option if you already defaulted on your monthly debt payments or are close to doing so (e.g., you are currently suffering significant financial hardship). A general standard to follow is you typically need to be around 180 days behind on your debt payments to be eligible for debt settlement.

Let's take a look at an example.

Example: Jamie lost her job during the COVID-19 pandemic, and after falling ill herself, she wasn't able to return to work. As a result, Jamie fell behind on her Discover credit card bills. After several months went by, Discover sued her. She took a look at her finances and decided she could afford to pay off 60% of the debt immediately. She used SoloSettle to send an offer to her creditor. After hearing Jamie's story and a few rounds of negotiations, they agreed to settle the debt for 55% of the original amount.

Your debt needs to be eligible for a settlement agreement

In general, various types of unsecured debt can be negotiated in the context of a debt settlement agreement. Examples of eligible unsecured debt include:

  • Credit card debt
  • Personal loan debt
  • Medical debt
  • Department store debt

What’s not on this list is “secured” debt, which is considered to be debt backed or secured by a form of collateral that helps mitigate risk to the lender. A prime example of a secured debt typically ineligible for a debt settlement is a type of debt carried by millions of people - student loans. Other examples of secured debt include:

  • Mortgage debt
  • Business-related debt
  • Tax debt

Settled debt is taxable

If you are considering pursuing a debt settlement agreement to get a portion of your debt balance wiped away, then you need to be prepared for a potentially-large tax bill. Why? Because creditors are required to report forgiven debt to the Internal Revenue Service, which views forgiven debt, including debt reduced by a debt settlement agreement.

As a result, you will likely receive a 1099-C tax form following a debt settlement agreement that you must include in your gross income for a particular tax year.

The following video explains the tax implications of debt settlement. Check it out.

Big Takeaways

  • Debt settlement is basically a negotiated repayment agreement that allows you to make a lump sum payment to a creditor in exchange for a portion of your debt balance being forgiven.
  • Not everyone qualifies for debt settlement. For example, your account needs to be in default, or you are suffering financial hardship,. in order to qualify for debt settlement.
  • The IRS considers forgiven debt to be taxable income.
  • SoloSettle, powered by SoloSuit, can make the debt settlement process simple.

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