Carrying large amounts of debt can be debilitating. It can affect every aspect of a person’s life, to the point where you would do just about anything to find a way out. So, if someone approaches you with an offer to reduce or eliminate your debt for less than the full amount you owe, it can seem too good to be true, right? The problem is, with debt settlement, it usually is. It is important to understand the risks associated with debt settlement.
The Process Is Not Quick.
One thing many debtors do not fully realize is the process of debt settlement is not actually quick. In fact, it can take anywhere from months to years to be completed. The first step is to accumulate enough money to offer a settlement to creditors. You first must enroll in a settlement program with a debt settlement company. The company opens a type of savings account to gather funds that you pay them monthly to use towards settlement offers. The debt settlement company will normally instruct you to pay them instead of your creditors. After you have reached the threshold determined by the company to begin making payments for creditors, the debt settlement company will negotiate with your creditors and collectors, if accounts have gone into collections, on a settlement. The company will use the money in your “savings” account to make these payments. This process can take anywhere from 12 to 48 months, depending on how much you owe and the monthly payments you are able to make.
Your Credit Score Will Take a Hit.
One major problem a with debt settlement program is the hit it will make to your credit score. For one, if your debt is successfully settled, your account status will read as “settled in full” instead of “paid in full,” which is less favorable on a credit report. Additionally, if a debt is settled, this mark will stay on your credit report for seven years from the date of final discharge or settlement of the debt. However, even more significant than this issue is what happens when you suddenly stop paying your debts. You take the risk that your creditors will put your accounts into past-due status or even turn them over to collections if you do not pay on them for more than 30 days. You assume that these debts will eventually be settled and cleared, but the damage that is done to your credit report in that time period can be quite significant.
Settlement Fees Are High.
Debt settlement companies do not perform this work out of the goodness of their hearts. After all, they are ‘for profit’ businesses, so they are performing this service with the intent of making money. Most of these companies charge a settlement fee that is either based on a percentage of the total debt settled or a flat fee taken at the end. According to a Federal Trade Commission (FTC) rule enacted in 2010, no debt settlement company can require a fee be charged upfront before settling or reducing a person’s credit card or other unsecured debt. They must be taken at the end. The fees can be high, however, so that can be a negative aspect to proceeding with debt settlement.
Do Creditors Have a Motivation to Settle?
Another problem with debt settlement is the fact that creditors have little motivation to settle the debt. They are under no obligation to work with the debt settlement company, and the debt settlement company cannot guarantee that their negotiations will be successful. In fact, if a company tells you that they guarantee they will be able to reduce or settle your debts, this statement should raise a red flag that the company may not be legitimate.
You can also negotiate with creditors on your own. You do not need to rely on the assistance of a third-party company to negotiate a lower payment on your debts or a lump sum reduction in what is owed. You will save yourself the fees that come along with working with a debt settlement company and can just as easily accomplish what you are trying to accomplish when retaining a debt settlement agency.
Debt Settlement or Bankruptcy?
Many times, debt settlement is simply avoiding the inevitable. You can spend years working with a debt settlement company to pay down a debt that would otherwise be liquidated in a bankruptcy case. If you are struggling to pay mostly unsecured debt, which includes personal loans, credit cards, and medical debt, this debt is what is normally discharged in a Chapter 7 or Chapter 13 bankruptcy case. With a bankruptcy filing, you get the benefit of an automatic stay, which essentially puts all collection matters on hold until the bankruptcy case is completed. If you choose to proceed with debt settlement first, you do not get this protection, and many of your accounts that would otherwise be liquidated in bankruptcy will go into collections or even be brought to a judgment, resulting in a wage garnishment against you. The result is you will take a significant hit to your credit score and pay monthly payments to a debt settlement company to negotiate on a debt that you would otherwise be able to discharge in a bankruptcy case. It may be more practical to proceed with the bankruptcy instead of other options, especially if the majority of your debt is unsecured. An experienced bankruptcy attorney can review your situation and discuss possible options that are available for handling the debt and eliminating it.
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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.