You’ve probably seen the ads. Reduce your debt by 70%. Get out of debt in less than 12 months. An alternative to bankruptcy. Too good to be true? Probably. What are these ads talking about?
They are talking about debt settlement, a program that promises to reduce your debt by negotiating with creditors. Sounds good, but the effect on your credit isn’t usually explained.
Here’s the story about how debt settlement works. According to CreditCards.com, you call a debt settlement company and tell them about your situation. You give them the names of your creditors and the amount you owe to each one. The debt settlement company then gives you an estimate for reducing your debt along with a new, lower monthly payment. The debt settlement company advises you to stop paying your creditors and instead to send payments directly to them.
So far, so good. But remember the part about stopping payment to your creditors while a settlement is negotiated? That is where the trouble comes in.
According to CreditCards.com, creditors don't typically settle debts until they're a few months past due. That means you have to stop paying your accounts for a few months. Meanwhile, your creditors report your late payments to the credit bureaus, your credit score drops, and you might begin receiving collection calls. You may even be sued.
According to financial guru, Suze Orman, if the debt settlement company successfully settles with your creditors, the delinquent information usually isn't erased from your credit report. Instead, your account is updated as "Charged-Off Settled" Or "Paid-Settled", neither of which is as good as a "Paid in Full" account. After debt settlement, it may a few months or even a few years to be approved for unsecured credit.
You could even owe taxes on settled debts. According to CreditCards.com., the Internal Revenue Service treats forgiven debts as income and expects you to pay income taxes on it. Creditors are supposed to send you a Form 1099-C for reporting cancelled debts. You must then report the debt on your tax return.
According to Suze Orman, if you are current on your accounts, or even a few months months behind, and you want to maintain a good credit score, then debt settlement is not for you. She recommends settling directly with the credit card companies or collectors, or considering Consumer Credit Counseling Services (CCCS), which will allow you to enter into a debt management plan with your creditors. Usually CCCS will be able to reduce your monthly payment, and you will be able to pay your balance in full. As long as your payments continue to be made on time each month, consumer credit counseling does not hurt your credit. Thus a debt management program is far superior to debt settlement.
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This blog is prepared by a paralegal student as a class project, without compensation. The content of this blog contains my opinion, and is offered for personal interest without warranty of any kind. Comments posted by others on this blog are the responsibility of the posters of those messages. The reader is solely responsible for verifying the content of this blog and any linked information. Content, sources, information, and links will most likely change over time. The content of this blog may not be construed as legal, medical, business, or personal advice.
Jane,
ReplyDeleteVery good information. I did not know that if you go through a debt settlement company it won't be considered paid in full. That is crazy. So if a collections agency sends you a settlement, does the same go for that if you only pay the amount they would except for the settlement? Good job!
If you settle with a collection agency, even on your own, you could still owe income taxes on the forgiven part of the debt and they will report that the debt was settled to the credit bureaus unless your have an agreement in writing ahead of time that they will report it as paid in full.
ReplyDeleteThis is very insightful. Instead of these debt settlement companies helping you they are rather causing you more harm. And you can even get sued for this?! You are rather at risk of losing more money and a bad credit score!
ReplyDeleteI found your post very informative. I continually hear the ads for debt settlement and I have often wondered just what that means. I enjoyed taking your debt quiz, although I didn't score very well :) But, now I know the correct answers! It is too bad that all of this debt information is available at a time where it does seem too late for the consumers who are carrying so much debt- it will take years for people to get out of debt, but, hopefully this economy will start to show more signs of improvement and wages will start to move forward for all.
ReplyDeleteAnother problem with debt settlement plans is that creditors are under no obligation to work with these companies, or to stop efforts to collect-including litigation. People come into court believing that because they are working with a debt solutions company that a creditor cannot seek a judgment. Wrong. And I have also heard stories about people paying debt solutions companies money upfront, only to have the company disappear without paying any creditors. Shameful. Good information!
ReplyDeleteJane,
ReplyDeleteI want to say thank you for your post on this subject. I can honestly say that I am appy that I never went through a debt settlement. I often found myself overwhelmed and thought that this would be a good way to get ahead. What did stop me was my fear of how it would affect my credit and so I never looked any farther into it than just the ads. Well, now I know some more information about the subject. So thank you!
I thought your information about the debt settlement was good information and it was things that I had often wondered about when it came to this type of company. I have a friend who is thinking of doing this I think that I will have her read your information that you posted before she does this I think itmay just change her mind.
ReplyDeleteJane,
ReplyDeleteDo to this blog of you wrote and I let a friend read she has decided that after reading your information that doing a debt settlement is not the best way to go. Thank you once again for the great information.