Debt Settlement

Offers Relief, But Has Costs

Debt settlement, negotiation, elimination, what ever you want to call it, is very different from credit counseling, or even a debt management program. It can be very risky. The long term impact on your credit rating and therefore your ability to obtain credit, can be very negative. Tread these waters very carefully. They are
extraordinarily dangerous.

Some of the claims.

• Non-profit Status
• Pay Small Percentage Of Balances
• Alternative To Bankruptcy
• Little Or No Impact On Your Credit

 Here Is How It Works.

A firm's claim to non-profit status is no guarantee the services they offer are legitimate. The firms usually have you stop making payments to your unsecured creditors. Instead you send your payments to the debt settlement company. They place the payments in an account out of which to pay the lump sums they negotiate as a settlement for you debt. Eventually you will have paid all of your unsecured debts off at a fraction of what you originally owed.

So how is this bad? Look at the reality. Your debt is increased before you pay anyone a single dime. These firms charge a fee to set up your account. They then charge an ongoing monthly fee.  Then they have a final fee which is a portion of the money you supposedly saved. And they don't negotiate or pay any debts until you have paid them a sufficient amount for them to give it to your creditors as a lump sum settlement of your debt.

Then It Can Really Get Out Of Hand.

When you stop payments on your debts, late fees and interest can be added each month. If, as these mount up, you exceed your credit limit additional fees and charges can be added. This can cause your debt to increase to double, even triple what you originally owed.

Now comes the real kicker. There is no guarantee that any of your creditors will accept partial payment to pay the debt in full. Your creditors are under no obligation to agree to settle your debt for any amount other that what you owe. Remember, somewhere you signed a contract.

That contract allows them to collect the amount owed them. That contract also allows them to report you as delinquent on your account to the credit bureaus. Some contracts even allow the creditor to sue for the amount owed them. This adds attorney’s fees to your total. And if they win they may have the right to garnish your wages or place a lien on your home.

Last Warning

One last warning. Let’s say you do get some of your  debt settled in this fashion. The creditor then files a 1099 for income earned. (If the amount of the debt forgiven exceeds $600.00) The IRS can consider any forgiven amount of your debt as income to you and subject it to income tax.

Hopefully you will look very hard and with a critical eye at debt settlement before you enter into any agreement with one of these firms.