Debt Settlement Solutions and Help
Understanding Debt Settlement
Also called debt negotiation, debt settlement is a procedure whereby a creditor agrees to reduce balance of a debtor. It allows for a debtor who cannot afford the debt management plan to pay at least a portion of the unsecured debt, which will be regarded as payment in full. The amount by which the loan will be reduced to depends on the efficiency of the debt settlement company.
How Does Debt Settlement Work?
When you enroll in the debt settlement program, you will have a trust account where your monthly payments will go to. You can usually access the account through a secure log-in area. The debt settlement company will wait for about 6 months or until there is enough money in the account before they start the negotiation process with the creditors. This means that under debt settlement, the debtor will not make monthly payments to the creditors. The debtor will instead deposit the money to the trust account until such time that an agreement with the creditors is made. The amount stated on the agreement should be acceptable to both the creditors and debtor. The debt settlement company will either pay the debt in lump sum or in installments. Debt settlement helps settle credit card bills, utility bills, personal loans, IRS debts, medical expenses, college loan debts, mortgage debt, and other unsecured lines of credit.
Is Debt Settlement for You?
Debt settlement is not for everyone. Some debt settlement companies only accept debtors who have outstanding balance of at least $10,000. You should also be behind on your payments for several months, and you cannot afford to pay the full amount. If you have a regular source of income, and you can pay if the debt is reduced, debt settlement may be a good option.
Benefits of Debt Settlement
Debt settlement is not an instant remedy to your financial obligations. This will also not raise your credit score. Nevertheless, debt settlement has many benefits such as:
- Balance reduction– Through debt settlement, creditors will agree to reduce the amount of your debt by a considerable percentage.
- Elimination of penalty and late fees– Debt settlement also works to have your creditors take out penalty and late fees from your outstanding balance.
- Stop collection calls– The debt settlement company will handle all your collection calls. Collection calls may also stop when an agreement is made with the creditors.
- Avoid bankruptcy– You will not have to file for bankruptcy when the creditors agree to a settlement plan that you can afford.
Disadvantages of Debt Settlement
Debt settlement is not an option for those who are late on their payments by only a month or two. Moreover, creditors are not required to accept a debt settlement offer, which means that debt settlement is not a guaranteed solution. The other disadvantages of debt settlement are listed below.
- Negative impact on credit score– Debt settlement will not help credit score. Because the debt is not paid in full, the creditors will not report the debt to the credit bureau as settled. This will also stay on the credit report for up to 7 years.
- Increased debt balances– The negotiation process will take months to complete. The debt settlement company will also wait until there is enough money in the trust account before the first settlement is negotiated. During this period, debt balances continue to accrue charges and interests.
- Tax payment– If a debtor will settle the debt for less than what he or she actually owes, the amount forgiven is deemed as income by the Internal Revenue Service (IRS). The creditor may send a 100-C tax form at the end of the year, and the debtor may have to pay income taxes.
Choosing a Debt Settlement Company
Debt settlement companies should abide by the federal laws. If they are found to make devious tactics to make money out of the debtors, they can get heavily penalized. However, this is not an assurance that all debt settlement companies can give you what you need. The tips below can help you find the right debt settlement company for you.
- Licensed– The debt settlement company should be licensed to conduct debt settlement procedures in your state. You can also visit the official website of the State Bar Association to check if the debt settlement attorney you are dealing with is listed.
- Reputation– The Better Business Bureau (BBB) keeps track of consumer complaints against an entity. See to it that the company you plan to hire is a current member of this agency, and that there are no issues filed against them.
- Fees– There should be fees involved in debt settlement. Be clear about their prices before signing any document with them. Fees can vary based on the amount of your debt, and the effort required of the debt settlement company. Research about the standard pricing in your area, and then compare quotes from different companies. Also, bear in mind that they can only collect fees when they have successfully negotiated at least one of your debts.
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