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How to know if debt settlement is right for you

On Behalf of | Jun 1, 2018 | Uncategorized |

Having a large amount of debt can be a shameful feeling. It may make you feel like you are bad with money. According to a NerdWallet study, the average American household has $15,983 of debt on credit cards. Clearly, you are not alone in this country. It is not always just credit card debt that adds up either. Often, people are laboring under mortgages, student loans, car payments, and medical debt.

Being in debt does not necessarily mean you are bad with money. Maybe you or your loved one got sick, and your insurance did not cover all the hospital bills. Or maybe you are paying off your student loans. Regardless of the reason, you have reached the point where you feel overwhelmed by your debt. A friend told you about debt settlement companies, and you think it might be time to contact one. Before you do, you might want to learn a little more about the process.

How the debt settlement process works

According to the Federal Trade Commission, debt settlement companies are usually for-profit companies that work to negotiate your debt down. They usually ask you to stop paying on your debt, and then put that money into an escrow account. After you have accrued enough money, the debt settlement company reaches out to your creditors and begins the negotiation process. They may try to get your debt reduced to as little as 25 to 50 percent of what you owe.

By having you stop payments, they are creating bargaining room. They are trying to convince your creditors that you will pay them nothing. Rather than having to write off the entire debt, the creditor would be able to collect some of the money with a debt settlement.

Your accounts may go delinquent

While you are not paying bills, the credit companies do not know you are working with a debt resolution company. They just know you are not paying your bills. Your accounts will likely go into delinquency and then default. The creditors may send collection agencies after you. It can hurt interest rates, and the companies could also charge you late fees. There is also a small possibility that creditors could sue you for non-payment. Generally for debts under $5,000, a company will not pursue prosecution.

No guarantee all debt will be settled

Debt settlement may not work. These companies do not guarantee they can settle all your debts, and creditors do not have to agree to settlement. There are companies, like Chase Bank, that simply will not work with debt settlement companies.

Sometimes, the monthly payments to the escrow account are more than people can afford. If they cannot afford these payments, they likely will drop out of the program. That means they will be no closer to resolving their debts.

It still hurts your credit

You may think doing debt settlement will protect your credit score, more so than filing for bankruptcy. Just 30 days without payment on a credit card can have a negative impact on your credit score. A credit delinquency remains on your credit report for up to seven years afterward. Bankruptcy stays on a credit report for about 7 to 10 years.

You may have to pay taxes on the money

The IRS usually views forgiven or discharged debt as taxable income. If you successfully get your debt reduced, you may still have to pay taxes for this money.

Debt settlement can seem like an easy way out of debt. However, there are many reasons it might not be the best plan for you. Maybe you are worried the company will not settle all your debts. Perhaps you are concerned your creditors may sue you. Or maybe you cannot afford the monthly payments. Debt settlement does not work for everyone, and there are risks involved.