When you find yourself in debt, and virtually everyone does at some point, it’s a brilliant idea to seek assistance. However, you must be highly cautious about the firms and service providers from whom you seek assistance; the treatment may wind up being worse than the sickness.
The fundamental facts are as follows:
Debt settlement firms are not the same as credit counseling firms, and the procedure is not for the faint of heart. A debt-settlement consolidation business will assist you in negotiating the reduction of your overall debt. You accomplish this by ceasing all payments. Late fees, interest, and penalties will continue to accumulate. However, you will set aside funds in an escrow account.
When enough money has gathered, the debt-settlement business will contact your creditors and try to persuade them to take a considerably lower sum, perhaps 10% to 50% of the total you owe, and write off the remainder as a bad debt. If you can persevere through the procedure, you may be able to pay off your debts and be free of the burden for considerably less than you owe. However, keep in mind that it will not preserve your credit, creditors will not always accept the lesser offer, and there may be tax repercussions.
Here are some things that debt settlement firms will not tell you – but we will.
- Things are looking up for our company.
The pitch might seem irresistible to constrained customers: a debt-settlement business will help them lower what they owe and become debt-free after a series of simple monthly payments.
However, opponents argue that debt settlement’s promises of financial independence can be illusory. At best, the solution includes trade-offs that customers should be aware of ahead of time, and at worst, “the consumer finds up in a considerably worse situation,” according to former chair of the New York City Bar Association’s consumer affairs committee, which investigated the problem.
- Do you want to collaborate with us? You’ll need a steel stomach.
Debt settlement is simply a high-stakes chicken game. In general, the schemes compel clients to cease paying their payments, allowing their debt to go into delinquency and, eventually, default. Then, instead of paying their creditors, clients pay a monthly fee to the debt-resolution business, held in an escrow account. The goal is to make creditors believe they will receive nothing so that when the debt-resolution business gives them anything, they will be more inclined to take it.
- We are not permitted to charge any advance fees.
Firms are not permitted to collect fees from a consumer until her obligations have been paid or otherwise addressed. Payments may begin as soon as a consumer enrolls in a debt-reduction program, but they are payments for the escrow account, often maintained by a third-party business.
Firms can take a fee for each debt they’ve negotiated if they settle a customer’s debts one at a time, but they can’t front-load payments.
- We aren’t the only ones in town.
American customers have a variety of debt-relief alternatives, each with advantages and disadvantages. On one end, there is credit and borrowing instruction and counseling, which is frequently given by a charity or government agency. Following that are debt management plans. These are typically provided by non-profit credit counseling organizations, which negotiate with creditors to devise a payment plan that allows consumers to repay their debts in full while paying lower interest rates, perhaps 7% or 8%, versus the 29 percent or higher that strapped consumers were previously charged.
- We will not keep your credit score.
Consumers may believe that debt settlement would be less damaging to their credit than bankruptcy, but the impact is far from benign. The technique encourages consumers to cease making payments to their creditors, causing the debt to become overdue.
- You might still end up bankrupt.
Debt-resolution companies promote their services as a less traumatic alternative to bankruptcy. Many customers perceive bankruptcy as a negative mark, and this resonates with them.
- We may not be able to pay off all of your debts.
Debt-resolution companies often handle unsecured debts such as credit card bills, hospital expenses, and unsecured personal loans. They do not deal with debt secured by collateral, such as a mortgage or an automobile loan.
- Our attorneys will not truly represent you.
Debt-settlement companies may mislead clients into believing that an attorney will represent them in discussions with creditors when, in reality, “attorneys are simply renting out their letterhead.”
- You are capable of completing this task on your own.
Nothing prevents a customer from directly dealing with his creditors. “Anyone may pick up the phone, call the creditor, and try to work out a deal.
Dealing with many creditors, to be sure takes planning and perseverance. Many customers may prefer the ease of dealing with a single debt-resolution company. Consumers may investigate businesses by contacting their state attorney general to discover if there have been any complaints filed against the company and consulting the Better Business Bureau.
- Prepare for a difficult period ahead.
Forgiven, canceled, and dismissed debt is typically considered taxable income by the Internal Revenue Service. Consumers who successfully reduced and paid off their debts through debt settlement may still owe Uncle Sam. Consumers will get a form in the mail for any eligible debt and will be required to disclose the amount in their gross income unless an exception or exemption applies.
One exception is available to taxpayers who are bankrupt, meaning they owe more than they own. However, customers should not expect to qualify for such an exemption when it comes to debt settlement.