According to Newton’s third law of physics; for every action there is an equal and opposite reaction. To a degree, this is true in life as well. Everything has consequences. If, for example, your financial situation is such that you’re considering engaging a debt settlement company, it’s a good idea to explore the consequences of debt settlement.
What Is Debt Settlement?
Sometimes called debt arbitration, debt relief or debt negotiation, the concept involves the brokering of agreements between creditors and consumers in which the repayment amount of a debt is reduced in exchange for payments in full of the agreed-upon amount.
To accrue enough cash to accomplish this, rather than continuing to pay your creditors each month, you’ll deposit those payments into a third-party held FDIC-insured escrow account over which you have complete control. The money to satisfy these agreements—once you approve them—will be drawn from this account.
Financial Effects
The aim of a debt settlement program is to clear up qualifying debts for less than the amount you currently owe. However, debt settlement only works for credit card debt, charge cards, revolving accounts, personal loans, medical bills and other unsecured obligations.
Mortgages, car loans and public student loans cannot be settled in this fashion. As a result, you may still be left with some debt after the program is completed. Granted, it could be considerably less than you owed before; but you will still need to pay the accounts you can’t settle.
Potential Costs
The IRS will see forgiven debt as income and could tax you on it. However, this varies by the amount your creditors agree to forego. To find out how much this might be, consult a tax professional to get an estimate after a settlement company evaluates your situation and determines which of your debts are likely to qualify.
Settlement company fees generally average around 21.5 percent of the settlement amount. However, a legitimate settlement company will only seek compensation on accounts they actually settle. In fact, Federal law prohibits them from accepting payment for negotiating on your behalf until an agreement is reached, approved by you, and paid off.
Negotiators can generally get lenders to agree to waive between 15 and 35 percent of outstanding balances. However, the exact amount varies from situation to situation, so costs vary.
Credit Rating Concerns
If pursuing debt settlement is looking like a good option, you’ve probably already experienced a reduction in your credit rating. Additionally, when you stop paying your debtors to build up the settlement fund they’ll report the delinquencies and your credit score will dip farther. Your credit rating will be affected, and you may be threatened with a lawsuit – but if you want to get out of debt and start rebuilding your finances faster, debt settlement might be the right option for you.
Legitimacy Issues
Yes, there are people out there preying upon unsuspecting individuals who need this kind of help. With that said, honest companies will be forthcoming about all of the consequences you’ve read above. When you get differing information, you could be talking to an unscrupulous person.
However, if you’re carefully diligent about your research, you’ll find companies that are sincere about helping you get your finances back on track, like Freedom Debt Relief. Other identifying traits of an honest company include at least 10 years of experience and accreditations by organizations such as the American Fair Credit Council.
Now that you are aware of some of the key consequences of debt settlement, interview a number of different companies. Debt settlement has worked for a lot of people and it can work for you too. However, it’s very important to do everything you can to be certain you have a solid understanding of all of the ramifications before you make this decision.