Debt Settlement is not actually a way to settle debt. In most cases it is not even an option at all. Many people advocate it as an alternative to bankruptcy . However, it is not as appealing as the adverts sound. “Reduce your debt up to 65 percent!” or “Get out of debt in less than six months!” In real life, it is not the same. Before considering debt settlement, carefully study this article to understand what you are going into.
Debt Settlement ; How It Works
It starts at you calling a debt settlement company and informing them of your debt. You supply to them your creditor’s name and the amount you owe. They in turn give you an estimate for reducing your debt along with a new, lower monthly payment. As advised by the settlement company, you stop paying your creditors and instead send payments to the debt settler.
The company uses your monthly payments to open a savings account. Once the account has grown to a certain amount, the debt settlement company calls your creditors and begins negotiating a settlement. The settlement must be lower than your full outstanding balance.
If an agreement is reached with your creditor, the settlement company will pay them and charge you for negotiating the settlement. It is either flat fee or a percentage of the debt canceled.
Debt Settlement ; The Other Side Of Debt Settlement?
Even though in the end, everyone gets paid and you’re able to move on with your life. However, that moment when you stopped paying your creditor and you were negotiating payment will cause you trouble. This is because creditors settle debts only when it’s few months past due. In this period you will get late payments which will enter your credit report to the credit bureaus. These late payments must badly affect your credit score . Yes! You have a settlement plan but the late payments remain on your credit history for up to seven years. This will affect you in many ways such as getting a credit card, loan, job or a mortgage.
Moreover, even when everything is properly settled, you will still see “Charged-Off Settled” or “Paid-Settled” in your credit report. Meanwhile, it is supposed to be paid in full.
Debt Settlement ; The Fallout
Here is the recovery period. It will take you months or some years to rebuild your credit and get approved for an unsecured credit card. What about taxes you will pay for settled debts? This is because the Internal Revenue Service (IRS) regards forgiven debts as income. This demands income taxes on them.
AT the early stage of the debt, do not go for debt settlement. Instead , go for consumer credit counseling. With this, you can create a debt management plan with your creditors. With this you can pay you balances in full monthly since they will reduce the monthly payments. This will not negatively affect your credit score or history.
Conclusively, you can devise another means to reach an agreement with your creditor. Ask them for hardship programs for you in your financial difficulty. Perhaps, they may give you a better option.