What is Debt Settlement, Really?
People who are in debt can be vulnerable when it comes to choosing a reputable debt relief company to help them get out of their financial quagmire and back in the black.
There are many advertisements out there right now that promise consumers they can "settle their debts" for pennies on the dollar.
This can sound especially appealing to someone who is worried and struggling to make monthly payments on their credit cards.
However, there are some things about debt settlement that people should be aware of before they agree to work with such a company.
It is important for consumers to understand debt settlement.
Debt settlement is a negotiation process through which a creditor agrees to "settle" a consumer's debt for less than owed.
This, in an of itself, can be a black mark on a consumer's credit report because the credit report will reflect that the debt has been "settled for less than owed.
" It signals to creditors that the consumer did not repay the full amount owed.
A consumer may be asked to sign over power of attorney to the debt settlement company, which means the consumer will no longer receive any communication from his or her creditors including monthly statements.
The fees associated with debt settlement can be very high and are often based on the amount of debt the consumer owes.
Some of the major creditors, such as American Express, do not work with debt settlement companies.
Creditors that do work with debt settlement companies require a consumer's account to be in a "charge off," or severely delinquent, status before they will even consider accepting a settlement.
Allowing accounts in good standing to go into a charge off will have a very negative impact on a consumer's credit score.
In addition, late fees and over the limit fees may continue to accrue while the consumer is saving up enough money to make a settlement offer, and the consumer could be subject to legal action to collect the delinquent debt.
Also, any debt that is forgiven through a settlement may be considered by the Internal Revenue Service as income.
That means a consumer is likely to get a 1099 form and have to pay taxes on the forgiven debt.
There are some cases where debt settlement can be beneficial to a consumer.
However, it is possible for a consumer to do their own debt settlement directly with their creditors without having to turn over power of attorney and pay large fees to a settlement company.
The best course of action for anyone who is in debt is to start with a credit counseling session with a non-profit credit counseling agency that is affiliated with the National Foundation for Credit Counseling.
A credit counseling session is free.
A certified credit counselor will help the consumer get a complete look at their financial situation, offer suggestions to help the consumer find the best plan to reduce their debt and give the consumer financial education to help them going forward.
Consumers should research any debt relief agency before committing to a debt repayment program.
This research should include checks with the Better Business Bureau, the state Attorney General's office and the Federal Trade Commission.
Consumers should also ask the company to disclose all fees up front and provide written contracts.
There are many advertisements out there right now that promise consumers they can "settle their debts" for pennies on the dollar.
This can sound especially appealing to someone who is worried and struggling to make monthly payments on their credit cards.
However, there are some things about debt settlement that people should be aware of before they agree to work with such a company.
It is important for consumers to understand debt settlement.
Debt settlement is a negotiation process through which a creditor agrees to "settle" a consumer's debt for less than owed.
This, in an of itself, can be a black mark on a consumer's credit report because the credit report will reflect that the debt has been "settled for less than owed.
" It signals to creditors that the consumer did not repay the full amount owed.
A consumer may be asked to sign over power of attorney to the debt settlement company, which means the consumer will no longer receive any communication from his or her creditors including monthly statements.
The fees associated with debt settlement can be very high and are often based on the amount of debt the consumer owes.
Some of the major creditors, such as American Express, do not work with debt settlement companies.
Creditors that do work with debt settlement companies require a consumer's account to be in a "charge off," or severely delinquent, status before they will even consider accepting a settlement.
Allowing accounts in good standing to go into a charge off will have a very negative impact on a consumer's credit score.
In addition, late fees and over the limit fees may continue to accrue while the consumer is saving up enough money to make a settlement offer, and the consumer could be subject to legal action to collect the delinquent debt.
Also, any debt that is forgiven through a settlement may be considered by the Internal Revenue Service as income.
That means a consumer is likely to get a 1099 form and have to pay taxes on the forgiven debt.
There are some cases where debt settlement can be beneficial to a consumer.
However, it is possible for a consumer to do their own debt settlement directly with their creditors without having to turn over power of attorney and pay large fees to a settlement company.
The best course of action for anyone who is in debt is to start with a credit counseling session with a non-profit credit counseling agency that is affiliated with the National Foundation for Credit Counseling.
A credit counseling session is free.
A certified credit counselor will help the consumer get a complete look at their financial situation, offer suggestions to help the consumer find the best plan to reduce their debt and give the consumer financial education to help them going forward.
Consumers should research any debt relief agency before committing to a debt repayment program.
This research should include checks with the Better Business Bureau, the state Attorney General's office and the Federal Trade Commission.
Consumers should also ask the company to disclose all fees up front and provide written contracts.
