Not All Outstanding Debt is Eligible for Debt Settlement

If you have an existing debt problem and you are evaluating debt settlement as an option, you need to understand which debts can and cannot be settled as part of the process. Depending on your situation, determining which debts qualify for debt settlement may eliminate this as a potential strategy.

Debt That Can Be Settled

The primary type of debt that qualifies for debt settlement is unsecured debt. A debt is unsecured when it is not tied to an underlying asset. Credit cards, medical bills, collection accounts, automobile repossession deficiencies, and personal loans are all types of unsecured debt and are the most common types to be settled.

In the case of an unsecured debt, the creditor has very little recourse outside of filing a lawsuit to recover the amount owed. There is no property to repossess. For that reason, creditors of unsecured debt are more willing to explore debt settlement because it allows them to recover a portion of what is owed to them and it is less expensive than going to court.

Debt That Cannot Be Settled

Debt secured by an asset, in most cases, cannot be settled. There is no incentive for the creditor to settle for an amount less than the current value of the asset they can take possession of in lieu of repayment. Home and auto loans are the two most common secured debts.

Loans guaranteed by state and federal governments, such as SBA loans and student loans, are not eligible for settlement. There are some instances in which a student loan can be consolidated or forgiven but not settled.

Court-ordered payments like child support and alimony cannot be settled. You can attempt to obtain a reduction in future payments thru the legal system, however, you cannot settle on past due amounts.

Federal, state, and local past due taxes cannot, in most cases, be settled unless hardship can be proven, an error in calculating the tax can be demonstrated, or you are unable to repay the tax based with an installment plan. If you have experienced a hardship or are unable to pay in installments, the process to settle is much different than working with a debt settlement company handling consumer debt or contacting creditors on your own.

Prior to entering into any debt settlement process, you must first determine which debts it is that you need to settle and if they qualify for settlement. If you are struggling with secured debt or tax issues, you will need to explore other strategies.

About the Author:
Chris Rocks is the Founder and Executive Director of the Credit Advisory Alliance (CAA). CAA is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score.

Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management.

He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others.