The Pitfalls Associated With Debt Settlement Programs

Feb 20, 2018 | Bankruptcy

Debt settlement is often advertised as the best route to obtain relief when you are in financial turmoil and are unable to make further payments on any credit or loans. However, that is hardly the case. Debt settlement is known to leave the debtor worse off than before the attempted debt settlement. People in financial crises may be influenced by advertisements or other marketing that promises to settle credit card debt for 50 cents on the dollar. The sales pitch for debt settlement generally portrays it as better than credit counseling, debt consolidation or bankruptcy. However, people have found that debt settlement offers are an easy way to lose over $800 in fees to the debt settlement companies.

Unlike bankruptcy, debt settlement is not a guaranteed way to get out of debt. Banks or other creditors are not obligated to work with debt settlement firms. Debt settlement firms often ask people to stop paying their bills and send money to the debt settlement firm instead to save for a future lump sum settlement with creditors. Debt settlement companies try to negotiate with the banks and settle on a small portion of your debts. Debt settlement companies generally charge upfront and monthly fees along with a percentage of the settled amount as part of their fees. Creditors generally will not settle a debt unless it is past due which means that you have to stop paying your accounts thereby allowing them to become past due. In the meantime, late payments get reported to the credit bureaus and your credit score takes a nosedive. You might even start receiving collection calls.

Late payments remain on a person’s credit report for a period of up to 7 years or until the negative payment history is replaced with some positive information. You will experience difficulty in getting credit cards or loans and may even have a hard time getting a good insurance rate. Unscrupulous debt settlement companies make no attempt to reach settlements when you ae paying fees continuously. Creditors often avoid dealing with debt settlement companies and that raises the potential threat of debt collection lawsuits.  Creditors may resort to legal tactics to collect what you owe through wage garnishment etc. At times the debt settlement process may actually be successful for certain people but those instances are few and far in between.

Even if the debt settlement process is successful your credit score is severely affected thereby having a negative impact on your future credit score. Future creditors who look at your credit report are able to see that settled your debt instead of paying it off unless the creditor agrees to remove adverse information that stays on your credit even after you pay off the settlement.  In certain cases even after reaching a successful settlement, people are still hounded by collection agencies for the remaining amount of their original debt. Even If the remaining amount of debt is completely forgiven it still may come back to haunt you as the IRS requires counts most canceled debt as income. Therefore you’ll owe taxes on the money you thought that you had saved.

It is vital to do the due research prior to signing up with a debt settlement firm. Debt settlement firms are mostly illegitimate and inappropriate for your situation. A Chapter 13 bankruptcy can help a person repay their debt under reasonable terms and within a reasonable amount of time. Therefore contact a qualified and competent bankruptcy attorney to discuss your options thoroughly.

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