Q: Do I have a legitimate financial hardship condition?
A: That all depends. There are personal circumstances which are sometimes hard to avoid, such as loss of employment, medical problems, death of a family member, loss of child support payments, divorce or some other serious event that has caused a severe economic hardship. Make a plan and set a budget. Where you'll be 12-24 months if you stick to your plan will be night and day.

Q: Am I really committed to avoiding bankruptcy?
A: Debt negotiation can be a great alternative. Creditors often welcome consumers with a genuine approach to debt settlement who are trying to work things out.

Q: What amount of debt are creditors most likely to negotiate on?
A: Generally if your debt is below $5000, aggressive negotiation strategies will not be as simple and effective unless you have at least $10,000 in debt. Negotiations can still be arranged but large reductions in principal are much more difficult to obtain when a consumer has lower levels of debt. A debt level of $10,000 to $30,000 is more in the range of when a consumer might consider debt negotiation but there is no fixed rule.

Q: What type of debt are most easily negotiated?
A: The types of debt easiest to negotiate are unsecured credit card debt. Department store credit cards, financing contracts, and miscellaneous bills can also be negotiated. However, the results may be less predictable for those types of accounts. Student loans cannot be negotiated since the IRS and state taxing agencies can simply nab your tax refund to collect any balance due. Auto loans are tough to get reduced since they are secured by the vehicle but can be refinanced. Mortgages that are in foreclosure can be negotiated, but usually with very unfavorable terms such as higher interest rates.

Q: How do I know if I have enough of a monthly budget to start the negotiation process?
A: Your monthly budget should be at least $200 for every $10,000 of debt. So if you owe $30,000 you would need a monthly budget of $600 or more. And the budget you actually need may be less than the current total of your monthly minimum payments. Since you could back off your monthly payments while still negotiating your debt in a responsible manner, this approach can work well for some consumers. If you take your lowest balance card, and instead of paying it - deposit the payment into a savings account, you can now have some leverage. But remember, if the account goes past 180 days past-due, it could go into charge-off status and paid charge-off.

Q: What happens to my credit when I start the debt negotiation process?
A: Your credit score will probably decrease during the negotiation process itself because the account and will show past due with the credit bureaus. How much it will decline depends on your personal circumstances. Your credit score should begin to improve after all your debts are settled. In addition, your debt-to-credit ratio will improve as your debts increase.

Q: Are there any tax requirements upon settlement?
A: Most banks feel they are required to report cancelled debts exceeding $600 to the IRS. You may also be required to report the "gain" you enjoyed on your annual tax return. However, if you were insolvent in the amount of $30,000 and you only enjoyed saving $25,000 by negotiation - the IRS may allow you to "write-off" that cancelled income. In any case, consumers should contact a tax advisor or attorney for advice specific to their situation just to be on the safe side.

Q: What if I would rather hire someone to negotiate for me?
A: There are plenty of companies out there, just be sure they're not "debt consolidation" companies who will only negotiate your interest. If you decide to hire a third party professional company, expect to pay between 3% to 8% of your debt as a set-up fee - a monthly fee plus an average 25% of the negotiated savings. It can get expensive.

Source: The Federal Trade Commission