Debt settlement is a strategy available to borrowers who have defaulted in payments of a debt owed and is unable to make further payments due to financial hardships.

Borrowers should be careful when entering into an arrangement for settling a debt for an amount less than the actual amount owed. In one case, a person received a notice from a collection agency that they were offering to settle the debt of $20,743.97 for $2,074.39. The debt amount was not actually owed by the person but by an acquaintance. The person was confused about making the payments and doubted the intentions of the collector. It is advisable in such conditions that the agreement should be put in writing. Unless there is an agreement about such settlement; one should not make a payment.

Borrowers should also be aware of how old their debts are and take caution with time-barred debts. Debts that are past the statute of limitations cannot be recovered by creditors or collectors. A debt recovery lawsuit needs to be initiated within the limitation period in order to be valid. Further, if a person wishes to pay the settlement amount, the collector is supposed to issue a 1099-C tax form evidencing the forgiven amount of debt. Such forgiven amount of debt is considered a taxable entity. The borrower should be aware of the tax implications in case of non-payment or part-payment of debts. Borrowers should seek help from a tax professional or consumer protection attorney to ascertain the eligibility of canceled debt exclusions. In case a person is eligible for such exclusions, the forgiven amount of debt would not be taxed.

Debt settlement is an important tool used to alleviate obligations; however, it is necessary that the borrower conduct proper research and seek professional advice for each stage of debt settlement.