Debt Settlement: The Insider Info

10/26/2020

Know the pros and cons before you decide to leap into debt settlement

When you find yourself in over your head with your debt payments, it can feel overwhelming.  The stress of constant collection calls and the uncertainty of your financial future can leave you sleepless.  Debt settlement is an option that is heavily advertised across the internet and television.  These offers usually sound like an easy way out of your debt, but are they?

Debt settlement is an agreement between a creditor and a consumer to pay back less than the amount owed.  While this sounds like a great deal, there are, of course, ramifications of which you need to be aware.

Companies that provide this service will contact your creditors for you and negotiate a settlement. Typically, they charge a fee for their services and you will usually need a lump sum to pay towards this settled amount. It is important to note that there is no guarantee that a debt settlement company will be able to reach an agreement with your creditor.

Paying a lump sum can be a challenge, especially if you were having trouble paying your bills in the first place. This is why debt settlement works best with only one or two accounts. It can be difficult to save enough money for the settlement if you are paying off several creditors at once.

 

The accounts that you settle should already be in default or charged off by the creditor.  Debt settlement will have a negative impact on your credit score, so settling an account that is still in good standing will cause an unnecessary ding on your credit. If you are having difficulty paying an account that is still current, then there are better options such as credit counseling and a debt management plan. The negative impact on your credit can make it very difficult to get a loan or credit in the future, so avoid settling any account that is not at least 5 months in arears.

There are plenty of companies that offer debt settlement.  Be aware that many of the for-profit companies that you see advertising on the web and television may push you further into debt or cost you even more with hidden fees.  It's imperative to read the fine print of any agreement offered.

There are risks associated with debt settlement and not all debt settlement companies have your best interests at heart.

The Risks of Debt Settlement

• •  While they negotiate, the debt settlement company may ask you to stop paying or speaking to your creditors. This may push your creditor to file a legal judgment against you.
• •  Delinquent accounts and debt charged off by lenders stay on your credit reports for seven years.
• •  Your credit report will be negatively impacted and will likely get worse before it gets better.
• •  Late fees and interest will continue to accrue during the settlement process making your debt worse.
• •  Stressful debt collection phone calls and mailings will likely continue throughout the process as well.
• •  The forgiven portion of the debt may be taxable. The IRS generally regards forgiven debt as income. So for example, if you have a debt for $15,000 debt and settle it for $10,000, the $5,000 difference would be counted as income, and would be taxable.

If you settle one or two accounts, but have several more that are in arears, then you need to have an alternate plan for those debts.  A good option for these other accounts may be a debt management plan.  Before deciding on any action including debt settlement, talk to a certified credit counselor.  They will be able to discuss all of your options with you including alternatives like debt management plans or a “Less than Full Balance” program.

A “Less than full balance” program is offered by non-profit credit counseling agencies.  Only delinquent accounts that are deemed ‘charged off' by the creditor can be included in this program. This usually means that they are at least 5 months in arears.  The program is a 36 month payment plan where you will repay 50% of the accumulated debt and at the end of the 36 months the remaining 50% of the debt is forgiven, without fees or interest. This kind of non-profit program has lower fees that traditional debt settlement companies charge.

You can find reliable information about debt settlement at organizations like the Consumer Financial Protection Bureau who can provide more information on debt settlement companies.

 

 

 

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