Debt Settlement Process – The meaning of debt settlement is that your creditor will agree to accept an amount that is less than the amount you owe to the creditor as debt. In other words, your debt settlement company will work towards coming up with a settlement deal that you are comfortable with. Professionals working for debt settlement organizations possess good negotiation skills. They negotiate with the creditors or lending organizations in such a way that they desperately look out for payments only to agree to the settlement terms and offered presented by the debt settlement experts.
It is for sure that your creditors will not be hounding you for money any further in life after the debt has been settled. Also, you will not have to worry about getting sued on the debt you owe to creditors and collectors. Nevertheless, the debt settlement process is something that does not only speak of gains but even certain disadvantages and risks. Although, debt settlement process appears to be the perfect deal for many debtors, it might be a little risky.
Debt Settlement Process
The debt settlement process comes with great many risks. It has the potential of destroying your credit score. It is also important for you to note that reaching a debt settlement might take a very long time. This time span is generally between two and four years. Debt settlement procedure can even be expensive for individuals on a budget. One of the most noteworthy points about this process is that it even if you find success in settling your debt; it might take you several years to complete the process.
At the end you will find yourself owing taxes on forgiven debt amount. Also, you cannot stay away from paying certain debt settlement fees to companies or professionals who help you out with the process. If you do not possess good negotiation skills in this category then going for the services of a debt settlement organization will be your last option.
Debt Settlement- How the Process Works?
Debt settlement procedure comes into effective play when an individual has skipped debt payments or when a person has several late payments or collections accounts. Collectors or creditors will never agree to settle with a lesser amount to be paid as debt if they are aware of the fact that you have the ability of paying the entire amount or the original amount that you owe. The matter of the fact is that you might feel hopeless; your credit rating will be ruined and you might not have sufficient income to maintain your debt obligations.
Different debt settlement organizations operate throughout the market with the objective of negotiating with the creditors so that they can bring about a reduction in the debt amount that their clients owe in the form of unsecured debts like the ones on credit cards. Debt settlement is considered one of the best options for unsecured debts but it might not be the right alternative for other varieties of debts like homes that can easily be foreclosed or vehicles that are likely to be repossessed by the creditors. Debt settlement companies also do not carry out the task of settling student loans. However, you might have the ability of settling such loans all by yourself. Going for income-based repayment plans would be the right idea for individuals who are having a tough time with their student loans.
Debt Settlement Company
Debt settlement deals seem to work only when it is impossible for the borrowers or debtors to pay back their debts in full. Even the creditors might get the same idea when they find that the debtor is not making debt payments any more. When you consult a debt settlement company to settle the debts you owe, you will find the company asking you to stop all communications with your creditor. This is done to inform the creditor that the borrower or the debtor is no longer able to make full payment of his or her debts.
Instead, the company has you opening a kind of savings account. Your debt settlement agency will ask you to make the monthly payments of your debt into this savings account. Once the agency feels that your account has sufficient money for making a good settlement offer, it will start negotiating on behalf of its client with his or her creditor and get the creditor into accepting a small amount as debt repayment.
Risks Involved in Debt Settlement
It is absolutely true that debt settlement has a number of advantages to offer to consumers. But at the same time, you cannot ignore that debt settlement even has certain risks. The risks of going for debt settlement start as soon as you hire the services of a debt settlement company. The industry for debt settlement is filled with scammers and unscrupulous companies that get their clients into believing that they can easily reduce their debts by around 50% while getting them free of their debts in less than 36 months. Nevertheless, it must be noted that the entire debt settlement process is not as simple and easy as the companies present it to be in front of their clients. Debt settlement should always be your last option mainly because of this huge scamming risk involved in the procedure. Other risks of debt settlement include:
Blow to Your Credit
Debt settlements remain in the credit reports of individuals for a time span of seven years. This is a long time and it might be possible for banks and other lending organizations to dismiss your requests for loans and other forms of credit during this time. Even if you paid off your settled debt amount as agreed with the creditor, your report of skipping the total debt amount and paying only a part of it will remain there on your credit. The banks will always enquire you about the same and will also refrain from offering you cash as loan or credit in the future.
Interest and Penalties Keep Accruing
People who go for debt settlement are likely to be hit with penalty charges and late fees. Even interest will keep accruing on the remaining balance of the debt. This might not be a good sign for the financial success and happy life of an individual who likes to get rid of all his or her debts.
Success Is Not Always Guaranteed
Majority of the debt settlement companies are of the view that there is absolutely no guarantee of resolving debts for less within a short span of time. Even the most reputable companies in this field find it very difficult to get the creditors into accepting their negotiation deals. If reports are to be believed, majority of the customers need to settle for minimum four accounts for receiving benefits. Additionally, the total debts of the consumers might rise with the fees accruing at specific intervals of time.
Debt Settlement Does Not Mean You DO Not Have to Pay Any Fee
If legal terms and conditions are taken into account, debt settlement companies do not have the right to charge upfront fees from their clients. Majority of these companies charge a certain percentage of the debt amount settled depending on the balance of the debt when a client enrolled for their services. There are other companies that charge a specific percentage of the debt that is eliminated through settlement. Besides making payments after the debts are settled, it is quite likely for the clients to face other charges and payments as well. These include monthly fees and setup charges for maintaining dedicated accounts under certain debt settlement programs.
Eliminated Debt is Taxable
There are many people who go for the debt settlement process without understanding or being clear about the fact that the debt amount that is eliminated by the creditor might be taxable. It is important for individuals involved in the debt settlement process to know that the IRS or Internal Revenue Service considers eliminated or forgiven debt amount as earning or income. In this case, it becomes important for individuals to consult professional and expert tax executives. They will be able to offer correct information about tax obligations that individuals might have to take on in case they go with the option of settling their debts.
Beware of Professionals Involved
Finally, if you have made your mind to go for the debt settlement process, make sure to get the services of your debt settlement agency or professional in writing. Be very careful about this because it is quite possible for you to be a little easier when settling your debt especially when you have a good offer from a debt settlement firm coming your way. Making the mistake of not researching about certain debt settlement agency thoroughly might land you into trouble. You might even end up getting into deeper monetary problem.
Overall, the debt settlement process will work for you only if you are able to get hold of the right and the most dependable company. Debt settlement companies have taken the market by storm by helping consumers get rid of their debts. But not all of them are genuine. Make sure to carry out proper research when dealing with these companies.