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Debt Settlement

If you look at credit card balances alone, personal debt in Arkansas is a huge problem. Residents are carrying at least $4,000 in that kind of debt per capita, according to recent reports (making it the state with the highest amount in the U.S.), and if they're not keeping up, then the consequences can be dire. Arkansas is one of four states in which arrests for outstanding debt were on the rise in recent years.

The following information should shed some light on the rules and regulations surrounding debt settlement. Use this information to help you decide if the approach is a good one for you.

Debt Settlement As A Solution

The numbers tell us that approximately 9 million Americans reach out to the organizations that can help them resolve outstanding debt. And one of the strategies that these organizations employ is debt settlement.

Some states carefully regulate processes such as debt settlement, but Arkansas maintains a hands-off approach to the matter. Nevertheless, it's important to confirm that the debt settlement assistance you seek is from an agency approved by the U.S. Trustee Program, operated by the Department of Justice. You can check that the agency with which you are dealing is listed here. (You'll notice that the organizations don't have to be actually headquartered in the state for the federal government to still approve their services in Arkansas).

When to Use It

Debt settlement is an option well suited to those who want and have the means to put a debt behind them once and for all. It's a sure step on the way to a better credit score. Note, however that while credit counseling in general is a prerequisite when one files for Chapter 7 or Chapter 13 bankruptcy, debt settlement is not. This is a strategy that focuses on satisfying the debt by paying off an agreed-upon portion.

How It Works

Debt settlement is handled by a third party, often a nonprofit federally-approved credit counselor — but sometimes an attorney or public accountant. What happens is that they negotiate a one-time payment that is lower (by some amount) than what's owed to the creditor. You send the agreed-upon sum to the organization or individual negotiating the settlement, and they give it to the creditor.

Even though Arkansas doesn't regulate the fees that individuals or organizations charge for debt settlement, you should be aware and informed about what you can expect to pay.

If you are handling debt settlement through a lawyer instead of a nonprofit counselor there may be legal and filing fees attached to your plan. There are also other kinds of fees that an organization may impose, such as "education" charges.

Be certain to find out up front how much your agency assesses for its services. Also, take into account that the amount forgiven under a debt settlement plan is almost always treated as taxable income.

Credit Counseling

Some states license credit counselors, but, as the American Association of Debt Management Organizations notes, Arkansas does not. Still, you want to make certain that the organization with which you work has undergone some amount of third-party assessment. In this case, a good place to start is the U.S. Department of Justice, which operates the U.S. Trustee Program, approving credit counseling agencies under federal law. (Note that some of the agencies on the Trustee's Arkansas list may have out-of-state addresses, but they've been approved to offer their services within Arkansas itself).

Once you confirmed that you're working with one of these, what follow are some key points to effecting a successful credit-counseling arrangement.

When to Use Credit Counseling

Credit counseling creates the opportunity to make good on debts and set a damaged credit history back on track. It's often a requirement to qualify for filing bankruptcy. You won't be able to restart with a completely clean credit slate, but you will be on the path to improvement.

How It Works

Agencies help you to create a credit counseling agreement. They negotiate for lower interest rates and reduced payments between the debtor and the creditor. These plans, typically set up for several years, require a monthly deposit to the credit counseling service and a promise from the consumer not to apply for or use any additional credit while the agreement is underway. A credit counselor may also help to settle a debt outright with a creditor. 

Detail For Arkansas Residents

If you're going to file for Chapter 7 or Chapter 13 bankruptcy in Arkansas, you'll need to tap the services of an approved credit counselor first. (See the DOJ list above.)

Don't just come up with a plan, get educated. Part of the mandate that the IRS sets for non-profit credit counselors is that they also provide free budgeting education. As you fix what may have gone wrong, use your credit counselor's resources to create stronger strategies going forward.