what is debt settlement?
Read the fine print. Understand what you are signing. We have all heard this advice yet there are many consumers who remain vulnerable to predatory lending or becoming a victim of a scam due to the fact they do not understand the contracts which they enter. With more and more Americans suffering financial hardships due to job loss or reduced salaries, many are turning to companies offering to reduce or eliminate their debt for some relief. Debt settlement companies are popping up everywhere you turn making it imperative to do your homework before you enter any program or agreement.
What is debt settlement?
Debt settlement or debt negotiation is a legal process where unsecured debt is settled for less than the amount owed. This process works for most unsecured debt and can reduce the amount you owe drastically. This allows consumers drowning in debt to settle their account and begin to regain control over their finances.
How does debt settlement work?
Regardless of who does the negotiating the process is the same. You will have to begin saving money to build up a settlement fund. When you have enough funds set aside, your settlement company can begin negotiating with your creditor for a reduced payoff amount. Since your accounts are delinquent your creditor is more inclined to settle for a lesser amount than risk not receiving any payment at all should you be forced to file for bankruptcy. It is not uncommon for debt to be settled for 25%-50% of the balance owed.
Who qualifies for debt settlement?
When it comes to debt relief options, debt settlement is the last resort before filing bankruptcy. This process is not designed for people who have the ability to make their payments or any other resources to eliminate their debt. While settling debt is a legitimate way to relieve your debt burden, it comes with risks and consequences that are only worth taking if you have no other option besides filing bankruptcy. It is important you understand this before considering this process.
What are the risks?
* There are no guarantees. This process whether you go it alone or through a company is not a sure thing. Any company that promises specific results should be avoided.
* Creditors may not settle. It takes time to save up money for settlement and some creditors will not wait until you have money saved or be willing to accept a lesser payoff amount. Most will, however you must know that until your debt is settled or paid in full, you could be sued or face other legal actions.
* Forgiven debt has to be reported to the IRS, and you may be responsible for paying tax on the amount forgiven if it exceeds $600. Again in most cases you will not have to pay taxes due to an insolvency exemption with the IRS, but it is a possibility.
* Your credit will definitely take a hit. There is no avoiding negative reports on your credit when your accounts are delinquent or settled for less the the amount owed.
* You must research the company before enrolling in their program. Settlement companies charge for their services and while there are legitimate companies that are successful in settling debt there are just as many or more companies that will take your money and provide little or no assistance in settling your debt. You should avoid any company that requires you to pay them directly, your money should remain in your control at all times throughout the process.
Settling your debt is a legitimate way to get back on your feet again. Do not get so caught up in the desire to become debt free that you avoid using common sense and caution when looking for a company to represent you in negotiation.
