To a person that is heavily in debt, debt settlement sounds like a dream come true. Debt settlement companies can negotiate a reduced one time payment of between 30% – 70% on your debt and your credit report reads that your debts are completely settled (although, your late payments will remain on the report). The thought of paying half of your actually owe would get any debtor salivating. As amazing as this all sounds, there are some problems with debt settlement.
The main issue of debt settlement is not the process itself. The real problem more often lies with the companies that provide the services. First of all, there are no standard industry fees. Some companies charge based on the debt before the balance is reduced, some charge a percentage of your actual savings. There are also monthly management fees that are tacked on to all of this. These management fees can sometimes be so large that it can take a year before your monthly fee is applied to the debt you owe. At first your monthly payment just goes to paying the settlement company. As time goes on the fee begins to pay off your actual debt. This can take some time, depending on the amount you owe.
The problem is that for the layperson, this can be very confusing. Many of their customers don’t fully understand the terms that they are agreeing to. They can be so desperate to get rid of their debt and start fresh, that they might just go with the first company that offers them help. But, there are big differences between debt settlement companies and the types of fees that they charge. If you consider debt settlement, shop around. Do your homework and make sure you understand what fees you will be responsible for.
Here are some upsides and some downsides to working with these companies.
The downsides are:
1) You can get sued. Not all creditors will happily work with debt settlement companies. So before they have agreed to a reduced payment, there is the possibility of getting sued by your creditor.
2) You might not qualify. Creditors will most likely not negotiate your debt if your are still current on your payments. Usually the cutoff is around 6 months of non-payment. They don’t have the incentive to negotiate unless it looks like you might go bankrupt.
3) You get taxed on the amount of debt that is forgiven! The reduction in payment is a taxable event, so you are liable to pay 15% of the reduction. This is not the case if your debt is greater than the amount of your assets.
4) Debt settlement advisors work on commission. This might influence them to be less than honest with you than they should be to get the sale.
5) Do it yourself debt settlement is possible.You might be able to do for free, what the debt settlement companies will charge you for.
The upsides are:
1) You can realistically negotiate your debt down 25% – 70%. If you are far behind on your payments, your creditor will want you to avoid bankruptcy. They can give you a big break on you payments if they know that you really can’t afford to pay the entire balance.
2)The creditor wants to avoid the hassles of bankruptcy, and you on the other hand get a reduced payment. Bankruptcy is very serious and can affect your ability to get credit, rent an apartment, or even get a job. So if you can avoid going BK, it might be worth it.
3)You have someone to walk you through the process. Its not always easy to understand the terms and fine print. If you can find a company that you trust, they can help you move along with the process.
Hopefully this will give you a little background on the debt settlement process and you can choose whether or not its right for you. There are many different companies with different types of fees and ethics. Arm yourself with knowledge before you sign on the dotted line.
*About the author: This is a guest post by Garrett Driscoll from Debt Eagle. Visit debt eagle if you need help with credit card debt. Garrett discusses topics like debt consolidation, debt settlement and credit counseling on the debt eagle blog.