Things To Consider Before Consulting A Debt Settlement Company
Although a debt settlement company may be able to settle one or more of your debts, there are risks associated with these programs to consider before enrolling:
1. These programs often require that you deposit money in special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled and end up dropping out of the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.
2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. There is a possibility that your debt settlement company will not be able to settle some of your debts — even if you set aside the monthly amounts required by the program. Also, debt settlement companies often try to negotiate smaller debts first, leaving interest and fees on large debts to continue to mount.
3. Because debt settlement programs often ask or encourage you to stop sending payments directly to your creditors, this may cause a negative impact on your credit report and other serious consequences.
For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
Debt Settlement and Debt Elimination Scams
Some companies offering debt settlement programs may not deliver on their promises, like their “guarantees” to settle all your credit card debts for 30 to 60 percent of the amount you owe. Other companies may try to collect their fees from you before they settle any of your debts. The FTC’s Telemarketing Sales Rule prohibits companies that sell debt settlement and other debt-relief services on the phone from charging a fee before they settle or reduce your debt. Some companies may not explain the risks associated with their programs, including that many (or most) of their clients drop out without settling their debts, that their clients’ credit reports may suffer, or that debt collectors may continue to call them.
Before you enroll in a debt settlement program, do your homework. You’re making a big decision that involves spending a lot of your money that could go toward paying down your debt. Enter the name of the company along with the word "complaints" into a search engine. Read what others have said about the companies you are considering, including whether they are involved in a lawsuit with any state or federal regulators for engaging in deceptive or unfair practices.
If you do business with a debt settlement company, you may have to put money in a dedicated bank account, which will be administered by an independent third party. The funds are yours and you are entitled to the interest that accrues. The account administrator may charge you a reasonable fee for account maintenance and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.
Before you sign up for the service, the debt relief company must give you information about the program:
● Price and terms. The company must explain its fees and any conditions on its services.
● Results. The company must tell you how long it will take to get results — how many months or years before it will make an offer to each creditor for a settlement.
● Offers. The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor on your behalf.
● Non-payment. If the company asks you to stop making payments to your creditors — or if the program relies on your not making payments — it must tell you about the possible negative consequences of your action.
The debt relief company also must tell you:
● that the funds placed in the dedicated account are yours and you are entitled to the interest earned;
● the account administrator is not affiliated with the debt relief provider and does not get referral fees; and
● that you may withdraw your money at any time without penalty.
Depending on your financial condition, any savings you get from debt relief services can be considered income and taxable. Credit card companies and others may report settled debt to the IRS, which the IRS considers income unless you are "insolvent."
You may be considered Insolvent if your total debts are more than the fair market value of your total assets. Insolvency can be complex to determine.
Talk to a tax professional if you are not sure whether you qualify for this exception.
Questions about debt collection?
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