Debt settlement companies make debt settlement sound like an attractive option for consumers. The reality is that for most of them it is not that great. Debt settlement , for the purpose of this article, refers to the practice of stopping all payments to creditors and saving the money instead for settling, and then once your accounts are sufficiently behind (usually 3 6 months), attempting to contact the creditor and settle the accounts for a smaller amount. In this article we ll cover a few things that every consumer should know about debt settlement.
1. You Should NEVER Use A Debt Settlement Company
Once upon a time, we thought there might be such thing as a legitimate debt settlement company. Unfortunately, it appears that such a thing doesn t exist not even in fairy tales. Why the pessimism? , you ask... The details are a little outside the scope of this article, but the basics are as follows: Debt settlement companies have huge fees. They re expensive. If you don t complete the program, you still pay the fees. These companies are NOTORIOUS for taking escrow money and RUNNING. This means that the escrow account you deposit money into to save for settlement funds isn t as safe as you may think. They also have very low success rates. One company that was shut down by the FTC had a completion rate of less than 2 . In several states, it s actually illegal for companies to sell debt settlement services for profit. What should that tell you? We ll cover more at a later date, so for now let s continue on to the next thing you should know about debt settlement which is...
2. Debt Settlement is Costly, even WITHOUT using a debt settlement company.
The appeal of settling all your credit card balances for $0.40 on the dollar may be enticing, but as in many scenarios, it s wise to look before you jump. First, consider the cost of what it will do to your credit. Consider the cost (both financial and emotional) of having your credit trashed and being left to clean up the mess once the settlement process is finally complete. If you follow through with most recommended settlement plans or use a debt settlement company, you re going to have a stack of late payments, collection notices, and other credit fall out to deal with. Then when you decide you need credit later, you ll be faced with the daunting task of cleaning the whole mess up (which can also be costly).
Next, remember that any forgiven debt is taxable income. This means if you get $12,000 knocked off a bill, at a 25 tax rate your tax bill will be around $3,000. (And don t think you can get out of that one as easily!)
Finally, when you stop paying your bills to start the so called debt settlement process , the late fees and interest are going to start piling up. Your interest rates will go up to the default rates. You ll be assessed late fees for each month you re late. The extra interest and late fees could easily end up costing you thousands, depending on the number of accounts and size of the debts involved. The risk regarding late fees and default interest rates is especially important to understand because of the next fact you should know, which is:
3. Not all of your creditors will settle.
And the worst part about this is that you have no idea which ones will settle and which ones won t. So you could, in theory, stop paying your bills, rack up a bunch of fees and crazy interest charges, let your debt balloon to an even larger out of control amount, and in the end have ABSOLUTELY NOTHING to show for it. The fact that not all creditors will settle brings up an important point, which is the next thing EVERY consumer should know about debt settlement...
4. You could get sued.
If there is enough money involved, it is perfectly possible that you will end up being sued by a collector or a creditor during the so called debt settlement process . When we talked about the cost of debt settlement, we didn t mention possible attorney fees for when you get sued. Debt settlement (unlike bankruptcy) offers NO REAL PROTECTION for consumers when it comes to lawsuits and collections.
5. There are other options available
As you can see, debt settlement isn t exactly an easy out when it comes to getting out from under your debt. Most consumers will be much better off if they can find other means to work through their debt issues without resorting to debt settlement. If you re going to use debt settlement, the best way to do it is to use it as a last resort when you are legitimately behind and struggling to make payments. Sometimes using some basic debt negotiation combined with other tactics can be a better approach that will salvage your credit score as much as possible and give you the financial breathing room that you need in order to survive. Some creditors may be willing to adjust the terms of your accounts by lowering payments, interest rates, and yes... even balances, if you contact them while attempting to get your finances in order.
Jay Peters is the founder of Credit Repair Publishing and has been publishing credit repair information since 1994. For their free eBook titled "28 Credit Secrets the Banks, Collections Agencies and Government Don't Want You to Know!" Visit their website at: http://www.creditrepairpublishing.com