Debt settlement gives them a distorted impression of what this process is really all about. Do not get us wrong. However, we need to paint the right picture for you so you will be relieved of any false assumptions about your expectations of this program.
Creditors will not always say yes. This is heartbreaking for some people but this is the truth. The chances of your creditor saying NO the first time we approach them is possible. But this is why you hired us in the first place. We will not give up.
Typically, the settlement requires you to pay a certain percentage of the debt you owe immediately, in exchange for forgiveness of the remainder of the debt. For example, if you owe a credit card company $10,000, you might be able to negotiate a settlement in which the company will accept $6,000 as payment in full.
Why would a company accept such a deal? If it seems unlikely you’ll be able to pay off the full balance, some companies may accept a “take-what-we-can-get” attitude. In other cases, the cost involved in taking you to court for the full amount owed may exceed the money lost in a settlement offer.
Credit Scores and Taxes
If you settle a debt for less than what you owe, your credit score may be affected, as you’ve shown that you’re either unwilling or unable to pay off debts. With low credit scores, you may have to pay higher interest rates on car loans, home mortgages and credit cards in the future — and that’s if a company is willing to extend you a loan in the first place.
Before you get involved in a debt settlement plan, learn how to find your credit scores.
Many banks and financial firms offer free access to your credit scores, which contain a detailed history of your credit activity and accounts. You’re also entitled to a free report if you’re ever denied credit.
One of the hidden dangers of negotiating a debt settlement may not become apparent until you file your taxes. Since the IRS considers forgiven debt to be income, you’ll have to pay income tax on the amount of debt you don’t repay. For example, if you negotiate a $20,000 debt down to $14,000, that remaining $6,000 becomes taxable income to you.
Counseling and Debt Payoff Options
Sometimes, using a debt settlement firm to negotiate a deal may do more harm than good. The problem is that many creditors won’t work with settlement firms, and you’ll be assessed late fees, penalties, and interest charges while your debt goes unpaid each month. At the end of the day, you may be left with lower credit scores and even higher debts.
Debt Settlement Pros and Cons
Long-term debt settlement is dangerous for consumers.
When you’re struggling financially, I can’t stress enough to you how important it is for you to make an informed decision about how you choose to deal with it. A long-term debt settlement approach is no picnic.
It is important to understand how Debt Settlement works before you enroll. Here we outline the key benefits and considerations of Settlement to help you further in your decision process about the best service for you.
Debt Settlement Pros
- May reduce your total debt drastically
- You save each month an amount you can afford to use to fund settlements
- Provides flexible payment arrangements (changes can be made if needed)
- An attractive alternative to bankruptcy
- Settlements typically completed in 3-5 years
Debt Settlement Cons
- Credit profile will be negatively impacted
- Debt is not repaid in full
- Creditors are not required to accept settlement offers
- Debt balances are likely to increase (i.e. late fees, interest) while settlements are being negotiated
- Collection activity will escalate
- It typically takes 6+ months before the first settlement occurs
- May you be taxed on the portion of the debt you don't pay back?
How do I Choose a Settlement Provider?
Selecting the right provider is a critical component to your success in becoming debt-free through Debt Settlement.
What to Look For In A Settlement Provider
- In business long enough to have built a solid reputation
- Electronic payment processing to ensure consistency
- Existing relationships with most creditors and collection agencies
- Support network to connect with other community members and find out how they are handling the day-to-day challenges of being in debt
- Robust educational resources to help you build your money management skills
