How to Settle Your Debts in Texas

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Written by Upsolve Team.  
Updated March 19, 2020

Summary

Successful debt settlement requires some time and effort. This guide will walk you through the debt settlement process and some popular debt management alternatives so that you can make an informed decision concerning how best to proceed. 

If you’re behind on your accounts, you may be wondering if you’ll have to file for bankruptcy. Depending on your circumstances, bankruptcy may be a good option for you. However, it’s important to explore all of your debt management and debt relief options before committing to one course of action. You never know which options may be good alternatives for you until you explore them in depth. For example, you may benefit from making a debt settlement proposal to at least one of your creditors. In a debt settlement, you make a large lump-sum payment to eliminate the remainder of the full amount due on your account. When the settlement process is complete, your account is closed. When a debt isn't paid in full it will temporarily harm your credit score at the time of the settlement. However, by improving your financial situation, a debt settlement will allow you to improve your credit score over time. You can negotiate your own debt settlement or you can hire a Texas debt settlement company to negotiate for you.

Texas debt settlements are best for people who are unable to pay their debts in full and are already behind on their debt payments. Generally, you can only settle unsecured debt and are only eligible to make settlement offers once you’re at least 90 past due on an account. However, if you either have money available or can sell some property to fund your settlement offers, pursuing debt settlement may be an excellent way to begin the process of becoming debt-free. A credit counselor can help you make an informed decision about this process and alternative debt management options as well. 

Learn More Through Free Nonprofit Credit Counseling

Anyone who is interested in learning about their debt management and debt relief options can benefit from scheduling a free credit counseling session with a credit counselor. Nonprofit, accredited credit counseling agencies provide free credit counseling sessions to anyone who wants to sign up for this service. Credit counseling sessions are confidential and do not obligate you to take any particular action whatsoever. 

During your free credit counseling session, your counselor will assess your income, expenses, and bills. You and your counselor will set goals related to managing your financial challenges. At the end of this first meeting, the counselor will recommend the best money management and debt relief options for your situation. These recommendations could include entering into a debt management plan, debt consolidation, debt settlement, or bankruptcy. The credit counseling agency can only negotiate a debt management plan for you. For other options, ask the counselor for recommendations for reputable providers. If you hire the credit counseling agency to administer a debt management plan for you, this service will cost a modest fee. Even though the credit counseling agency is a nonprofit, they still have to cover the costs of paying their staff.

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How to Settle Your Debts in Texas

Successful debt settlement requires some time and effort. This guide will walk you through the debt settlement process and some popular debt management alternatives so that you can make an informed decision concerning how best to proceed.


Collect the Details About Your Debts

The first step to a successful debt settlement program involves evaluating your bills. Since these debts are what you’re trying to settle, you need to understand everything you can about these debts and about your accounts generally. Although you’ll only be able to settle unsecured debts (such as credit cards, medical bills, and other unsecured loans not tied to collateral), you’ll want to gather information about all of your debts. This will allow you to give your credit counselor and any debt settlement company you’re interested in working with a clear picture of your financial situation.  

It's also important to get your free credit report from each of the three credit bureaus at this time. Use these credit reports to refamiliarize yourself with debts that you may have forgotten and debts purchased from your original creditors by debt collectors. If this has happened to you, these debt collection companies will serve as your creditors for the purpose of your settlement negotiations. When looking at your credit reports, look for errors that could harm your credit score, as you’ll need to have these errors fixed.

Collect Details About Your Ability to Settle Your Debts

If you’re settling your debts through a short term installment agreement or you have constructed a payment plan to build up your balance with a Texas debt settlement company, know that staying on budget for the duration of your debt settlement process will be very important. You can’t miss even one payment. If you do, your settlement agreement may be voided and you’ll be in a terrible financial position. Accurately calculate your income and expenses so that you can make absolutely sure that you can afford to make your scheduled payments on time, every time.

Note however, that not all income is created equal for the purposes of debt settlement. Using money from a retirement account such as a 401K or an IRA is one of the worst personal finance decisions you can make. If the retirement plan isn't a "Roth" plan, the money taken out will be taxable income that you will pay income taxes on. If you're younger than 59 1/2, you'll also have to pay a tax penalty. All debt forgiven in debt settlements is considered taxable income. 

Consider the following example: A 58-year-old with a $10,000.00 debt takes money from their IRA to settle the debt for $5,000.00. Their IRA is not a Roth IRA. How much taxable income do they have for this transaction? There is a 10% tax penalty on the $5,000.00 withdrawn, the $5,000.00 withdrawn is also taxable at your regular tax rate. Add to this the $5,000.00 for debt forgiveness which is taxable income. This is the $10,000.00 debt minus the $5,000.00 settlement amount. So, from this single transaction, there is a $500.00 penalty plus $10,000.00 of taxable income. If the effective tax rate is 20%, there would be $2,000.00 plus $500.00 for $2,500.00 in taxes due. Add this to the settlement amount of $5,000.00 and it cost $7,500.00 to settle the debt when taxes are considered. 

Learn About the Costs to Settle Your Debts in Texas

If you hire a Texas debt settlement company to help you negotiate with creditors, make sure to understand how they calculate their fees before signing a client agreement. The debt settlement company's fees will either be calculated as a percentage of the full debt amount or as a contingency fee. A contingency fee is a percentage of the total amount they save for you. The contingency fee is the best option since it incentivizes the process: if the company gets you a great deal, they get paid more. Also, if you hire a debt settlement company, you’ll put your money into a third party administrative account that isn't controlled by the debt settlement company. This arrangement leads to bank fees and maintenance fees charged by the third-party administrator.

Decide Whether to Work With a Texas Debt Settlement Company

You don't have to hire a Texas debt settlement company to pursue debt settlement. Debt negotiation is something you can do yourself. If you work with your creditors directly, simply make sure to get a written settlement agreement before sending any creditor the settlement amount. The primary advantage of going through the debt settlement process on your own is that you don't have to pay the fees and other expenses associated with hiring a Texas debt settlement company. 

The major downside of doing your own debt settlement is that debt negotiations are hard work. It's like having a second job. You may not have time to do this. Another downside is that when you have questions, your only option may be internet research. For these reasons, the cost of hiring a debt settlement company may be worth the investment. There is no single “correct” approach. You need to do what works best for you uniquely. 

Research Texas Debt Settlement Companies 

Before hiring any company to handle your personal financial situation, research its reputation and Better Business Bureau rating. Since some Texas debt settlement companies have been identified as scams, it's a good idea to follow this advice from the Attorney General of Texas. If you have any questions about a debt settlement company you’re considering hiring, call the Attorney General's Consumer Protection Hotline at this phone number: (800) 621-0508. You can do further research on any debt settlement company by looking at the Consumer Financial Protection Bureau's Consumer Complaint Database. This is a nationwide database. Note though that company is going to please everyone. Use your common sense and consider how many complaints there are, whether any of the complaints are from Texans, and if the word "scam" appears in numerous complaints

How to Make Your Debt Settlement Work

Unless you already have a substantial amount of capital to offer as a settlement or you’re selling property to fund your offers, it’s going to be important to stick with a budget for the remainder of your debt settlement process. Whether you’ve agreed to a short-term installment arrangement with a creditor or a payment plan with a debt settlement company, you need to make your payments on time or risk defaulting on your settlement. When constructing your budget, set aside money monthly for expenses and for emergencies. You want to be prepared for anything that could compromise or even ruin your ability to make your settlement payments on time. 

It may be a good idea to keep a credit card that isn't included in the settlement to use for emergency expenses. The card can also help rebuild your credit after a debt settlement. The problem is the credit card company may not let you keep the card. If you keep one card with a company and try to settle another card with this same company, the credit card company may not let you keep the second card since you are proving yourself to be a credit risk. All credit card agreements allow the credit card company to check your credit report. If they see that you're settling with other creditors, they will worry about your ability to pay them. They could close your account or reduce your credit limit. This can happen even if you have no outstanding balance on the card. So, be cautious when determining whether you want to keep specific credit cards open and active at this time. 

Alternatives to Debt Settlement

For some types of debt, a debt settlement may be the best option for you, if you have sufficient funds available to offer to your creditors. However, most people in debt don’t have ready access to this kind of income. As a result, for most people and most types of debt, you’re going to want to consider some debt management or debt relief alternatives. 

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Texas Debt Consolidation

A Texas debt consolidation loan will allow you to combine high-interest, unsecured debt under the umbrella of a single account. This will allow you to streamline your debt management, ideally at more favorable rates than you are paying now. However, you need a high credit score to qualify for a low-interest rate loan that's large enough to at least pay off your debts. If your credit score is low, a debt management plan may be a superior option. 

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Texas Debt Management Plan

A Texas debt management plan is a form of debt consolidation that doesn’t require you to secure a new line of credit. A debt management plan combines your included debts into one account that is managed by a nonprofit credit counseling agency. Your credit counselor negotiates a repayment plan with your creditors and then you submit a single monthly payment to the agency. The credit counseling agency then uses this money to pay your debts, ideally at more favorable rates than you’re paying now. 

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Texas Bankruptcy

When all is said and done, a Texas bankruptcy might be your best option. Anyone with substantial debt challenges should take advantage of the free initial consultation that most bankruptcy attorneys provide. Before meeting with a bankruptcy attorney, study the resources on Upsolve’s Learning Center and make a list of questions. It's important that you get your questions answered so you can make an informed decision. If you’re eager to file on your own to save money, Upsolve provides a way for you to file your own Chapter 7 bankruptcy for free.

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

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