When facing overwhelming debt, it can seem like there is no way out, the thought of a third-party debt settlement company coming in and negotiating down the debt can seem like a dream come true. While it can be tempting to jump at this offer, there are several important facts that debt settlement companies will not tell you.
It is important to first understand what makes a debt settlement company different from the normal credit counseling service. A debt settlement company assists in negotiating down the individual’s debt. To qualify, the individual must stop making payments on any debts. All of the late fees, interests and penalties will continue to grow during this time, and the debtor will make payments to an escrow account held by the debt settlement company. When a specified amount has been saved, the company contacts your creditors and tries to get them to accept a lower amount to settle the debt.
- If it seems too good to be true…
The consumer facing mounds of debt is able to settle the case for less than what he or she owed. In return, the debt-settlement company collects fees from the consumer for having to negotiate the debt. However, like many things that sound too good to be true, it is not always that easy. In fact, the consumer can end up in a much worse financial situation than they were in before. The debt settlement company, on the other hand, comes out earning fees on the payments made by the consumer. Many times, the consumer will never end up seeing the light at the end of the tunnel and will end up filing for bankruptcy anyway. In the meantime, he or she has been making payments in an escrow account, while accruing fees and costs accumulate.
- Debt settlement is not an easy process.
The individual has to basically stop paying his or her bills and let all debt go into delinquency or default. The money that would be going towards the debt goes towards the debt-settlement firm and into an escrow account. By stopping payments on current debts, the creditors are supposed to be fooled into believing they will never receive payment, which will make them desperate to take a lower settlement. However, until that happens, it does not mean the collections efforts will stop. The creditors will want to receive payment and will continue doing anything they can to receive it. The debt settlement firm cannot stop the calls from coming, and they cannot stop the collection efforts during all of this.
- Debt-Settlement Companies Cannot Ask for Upfront Fees
In 2010, the Federal Trade Commission made it illegal for for-profit debt-settlement companies to charge upfront fees. Firms are not allowed to collect fees from the consumer before they have settled the debts. If the company is settling debts one debt at a time, fees can be collected on that settled amount, but they are not allowed to ‘front-load’ fees.
- There are other alternatives to debt relief.
Other debt-relief options are out there. Credit counseling is available, and many non-profits offer education for consumers on how to get rid of debts. Debt management programs offered through non-profit credit counseling services are also available. Additionally, if all else fails, bankruptcy is an available option. It helps to sit down with a bankruptcy attorney to discuss the possible options, as well as the best ones for the specific debtor.
- Debt-Settlement Will Not Save Your Credit Score.
The fact that the consumer simply stops paying his or her credit cards, letting them go delinquent means that the individual’s credit is going to take a hit. Even missing a payment for 30 days means that the consumer’s credit score is going to get hit. Once that happens, it can be hard to get it back.
- The Consumer May Still End Up Filing for Bankruptcy.
When all is said and done, the debtor may end up back at the point where he or she would have ended up had he or she not sought debt-settlement. The bankruptcy process provides some protections for debtors that debt-settlement does not. All collection efforts stop with the automatic stay, including the fees from accruing. Also, the Chapter 13 bankruptcy process allows a more structured way for the individual to pay back the debt.
- Not All Debt Will Be Settled.
It is possible that the debt-settlement company may not end up settling all of the debt. They normally deal with liabilities that are unsecured, like credit cards, medical bills and unsecured loans. Debts that have collateral attached to them, such as mortgages or car loans, can be a little more difficult. Creditors are not under an obligation to work with debt-settlement companies, which is why many debts end up not being successfully settled.
- Debt Settlement Lawyers Do Not Represent You.
Many debt-settlement firms will tell consumers that their attorney represents them in negotiations with the creditors. However, half the time that means the attorney is basically letting the debt-settlement company utilize their letterhead. Most of the time, the attorney on the letterhead will never truly represent the consumer, and consumers should never assume or rely on false promises that they are legally protected by representation.
- You don’t need them.
One big issue debt-settlement companies do not want you to know is that you can do this alone. Nothing prevents a consumer from negotiating a settlement directly with the creditor. Many consumers are actually successful in working with creditors on a mutually-beneficial solution, independent from third-party intervention.
- Prepare for Tax Consequences.
The Internal Revenue Service considers debts that are forgiven, cancelled or discharged to be taxable income. If a consumer is successful in reducing or paying off their debts through settlement, they may still owe taxes for the amount that has been written off. In fact, consumers will receive a 1099-C form for any debt that applies as income, and this will need to be reported as gross income for taxes. The only exception to this rule is for taxpayers who are insolvent, meaning they owe more than they own.
If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.