Debt Settlement FAQs

Debt settlement is when you pay off debt at a reduced amount, often at 50% or less.

A small business or individual with $30,000 or more of unsecured debt, who has a 401k plan, an inheritance, or a lump sum distribution. Usually, approximately 60% of the debt amount must be set aside in escrow, to settle debt when agreement is reached with the creditor.

Most of the time creditors will not negotiate with individuals, or debt settlement companies. They will ask an attorney for a “power of attorney.” An attorney locks in the terms, so that the creditor cannot change them, and try to collect more interest or fees later. An attorney can also protect you in the event of a lawsuit occurring while negotiations are ongoing.

Usually the communication with the creditor begins early enough that a lawsuit is avoided.

Most of the time a creditor will not begin negotiating until debt is 6 months past due. In most cases debt settlement is usually completed as soon as terms are reasonable.

There could be tax due on money saved. Your accountant can see if you are exempt from taxes under IRS Insolvency Rules, Publication 4681.

There is a risk of a lawsuit occurring before the debt is settled, which is usually avoided by using a local attorney. One’s credit score could decline as negotiations are taking place, as penalty interest and fees are assessed.

For more information or to set up a consultation, contact the Law Offices of Mike Norris at (317) 266-8888 or email Mike at mike@mikenorrislaw.com.