What is debt settlement?
When a creditor agrees to accept less than the amount you owe to pay off a loan, you have settled the debt. Your debt will be wiped out, and you will not be responsible for making any more payments. Debt collectors will not harass you, and you will sleep better knowing you won’t be sued for a debt.
Debt settlement involves the reduction of the original amount owed for unsecured loans such as credit cards and medical costs. Credit card settlement is the most common form of settlement practiced today according to the Better Business Bureau.
Sounds like a good option, doesn’t it? However, there are some pitfalls you must be aware of before you take the debt settlement route.
An alert has been put out by consumer finance groups warning of the dangers of debt settlement. If you are considering this option, beware this is not a solution that works for everyone, and you run the risk of prolonging your financial pain. Furthermore, while your debt settlement negotiations are taking place, you will be under fire for late fees, collection notices, harassing phone calls, using threats.
At last, your debt settlement efforts may be successful, but it may take years of your time to reach your goals while in the end, you may owe taxes on the forgiven debt amount. Debt settlement companies, on the other hand, may charge fees that you can’t afford or are not worth the amount of effort put into the negotiating table.
How does the debt settlement process work?
First of all, analyze your debt situation, you can only begin a debt settlement process when you are considerably behind in payments. More than three skipped or late payments, and accounts in collections are the factors initiating debt settlement negotiations.
If your negotiation efforts are not yielding the desired outcomes, it may be time for a professional debt settlement company to step in and work out a plan that you can live with for a fee, which is usually flat. There are both, non-profit and for-profit companies dedicated to making your debt settlement experience the most affordable and with the most significant benefits to your advantage. It all depends on the size of your loan, o loans, and the length of time of your debt.
Instead of paying your monthly dues, you must open a savings account and deposit the payments there. Once the debt settlement company believes there is enough to leverage with, it will make an offer to reduce the loan by the percent amount available in cash.
Secondly, an equally significant factor you can expect to encounter when you decide to initiate a debt settlement process is that as long as the creditor believes you have a way of paying, either through your job or your assets, they will stand their ground and refuse to settle with you. Furthermore, some loans are not eligible for settlement. In the case of an auto loan, your automobile will be repossessed. If it is a home mortgage, foreclosure proceedings will take place, or a lien will be placed on your equity. The bottom line for every financial institution is to make the debtor pay whichever way they can. Their legal and collections department work hand-in-hand to safeguard the company’s return on investment.
It’s best to know what you’re doing before you make a move. If you meet the criteria for debt settlement, assuming you are 90 days or more behind on payments of unsecured loan, make sure to put your offer in writing, address the email or letter to the right department head, speak with them on the phone, or visit their branch if they’re nearby, before submitting the offer. Face-to-face conversation, or at least phone calls, is a more direct and active mode of communication than only by email.
Expect a response within two to three weeks and let the games begin. This is where 80% of do-it-yourself settlement efforts fall through. When you receive a response, make sure it is signed and proceed with caution. An agreement stating the conditions of the offer must be spelled out in perfect financial jargon to ensure there will be no loose ends at the end of the process waiting for you in the form of fees and penalties. You must have this letter drawn by an attorney, or you may purchase one online from any of the legal aid sites available to consumers. Have the agreement notarized and scan the originals or send via snail mail. As a rule of thumb, don’t forget to call asking if the paperwork was received and make sure to speak with the indicated staff member or leave a message in the right inbox. Follow through on all the communication traffic with the institution and save their emails in a separate folder for easy access in case you need to reference them.
What are the consequences of debt settlement?
At this point in the game, your credit scores will have been shred to pieces. It will be difficult for you to get any more credit at a reasonable interest rate. You will feel frustrated, and in despair, you might act against the best recommendations. Relax and think of the debt settlement process as a cleansing tool for your financial wellness after which you can regain the strength necessary to improve your credit standing and begin a new financial life.
If your negotiation efforts are not yielding the desired outcomes, it may be time for a professional debt settlement company to step in and work out a plan that you can live with for a fee, which is not usually flat but a percentage of the forgiven debt resolution. There are both, non-profit and for-profit companies dedicated to making your debt settlement experience the most effective, with the highest percentage of debt forgiveness possible to significantly benefit your advantage. It all depends on the size of your loan, or loans, and the length of time of your debt.
What is debt settlement not?
Debt settlement is not acceptable in the case of a home, which goes through a foreclosure process; an auto loan, which can be repossessed; or a student loan. Income-based repayment plans and hardship programs are available to consumers who are experiencing financial stress due to unforeseen situations.
Instead of paying your monthly dues, you will open a savings account and deposit the payments there. Once the debt settlement company believes there is enough to leverage with, it will make an offer to reduce the loan by the percent amount available in cash. Promises to reduce your risk by up to 50% in 6 months are not uncommon among debt settlement companies. The process, however, has been known to take up to 36 months. It should be considered a last resort.
What are the risks associated with debt settlement?
Your credit report and credit scores will be adversely affected. Furthermore, a delinquency status on your accounts will lower your credit rating significantly. You run the risk of having the account charged off by the credit card company in which case the detriment to your credit report will last for seven years.
The accrual of late payment fees and penalties on your account will continue. Even if the lender agrees to discuss the possibility of a debt settlement, the late payment charges, interest, and penalties will continue to jack your debt higher and higher, and it will be more difficult to wipe them out entirely.
There’s no guarantee of success: Whether you turn to expert companies like the National Debt Relief or the Freedom Debt Relief or you do it yourself, there are no guarantees. Even if you do resolve your debt for less, in many cases, the amount settled for is considerably higher than you had anticipated. When this happens, the savings are not worth the trouble, unless you have to. Collection attempts and continual adverse reporting will keep hounding you.
Fees to settle the debt may be up to 25% of the amount resolved. Because the law prohibits debt settlement companies from charging initiation fees, most of them charge a percentage of the debt they settle. This is their motivation for their services. The rate may be one-fourth of the total amount, and you will need to pay during the process, not later.
You will owe taxes on your forgiven debt. Be aware that a forgiven debt is taxable. The Internal Revenue Service considers forgiven debt as income. Consult with a tax professional about how this works on your tax return sheet as you will have to declare your forgiven debt as income.
Don’t let your guard down when you’re dealing with a debt settlement company. Professional debt settlement services may not be able to help you decrease your debt and instead may even cause your plunge into deeper financial troubled waters. Approach them with caution and keep asking the right questions. Contact the Consumer Financial Protection Bureau to learn more about the risks involved.
Author Information: Steve Piorro writes on behalf of Consumer credit card relief and writes an article on credit card debt, debt consolidation, debt settlement, bankruptcy etc. Steve has been helping people to manage their finances in an easy and intelligent manner.
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