Think about this scenario. You have over a hundred thousand dollars worth of debt, an accumulation of a mortgage and credit card bills. You have drained all your cash flows to keep up with the monthly payments and are finally falling short. After sometime, the collectors start calling and very soon those polite phone calls boil down to downright harassment. To save the situation, you try and negotiate with your creditors to lower the debt amount as relief. What do you do when they don’t listen? In such situations, a lot of borrowers usually turn to companies offering debt relief services like debt settlement. They charge you a fee, but get the job done. Usually these companies can get your debt amount drastically lowered to less than half the original amount many times. However, always step with caution when dealing with the industry of debt settlement.
Know the difference
Remember that there’s a difference between debt settlement and debt consolidation. In the latter, borrowers usually take a big loan to pay off all the smaller debts so that their monthly payments come down to a single amount. In credit counselling, companies offering debt relief services negotiate with the creditors to reduce interest rates. Debt settlement however means debt relief, and paying off a reduced amount as a lump sum.
Look before you leap
The debt settlement industry is unregulated and therefore full of potholes for borrowers. There are many scams and frauds hidden out there and you have to be very careful about whom you choose to trust your financials with. However, there’s no doubt of the popularity of this segment because it has picked many a consumer out of financial ruin and shown them a way out. Debt settlement is a godsend especially for those looking to avoid bankruptcy. However, always be aware of the dangers.
Firstly, there’s always fraud. There are many companies who will offer you schemes ad plans which are too good to be true. They will charge you a hefty upfront fee and then flee. There will be other companies which will be too inexperienced too deal efficiently with the creditors.
There is a trend of increasing hostility towards debt settlement companies from creditors. Many creditors turn over defaulting accounts to collection agencies who then file lawsuits against the borrowers. Other creditors themselves sue clients if they are being contacted by the latter’s debt settlement agencies.
Since it’s an unregulated industry, the consumers are completely unprotected. The federal government doesn’t have any measures in place, and very few states do, either.
A lot of borrowers think that the debt amount forgiven is the debt gone away. That is a common misconception. The amount of money that is forgiven is added to your taxable income according to the tax bracket that you are in.
Lastly, be prepared to spend both time and money if you are considering hiring a debt settlement company. Companies charge quite a fee for their services. While some charge a portion of the total amount of debt that you owe, others take a large chunk of the amount that they manage to settle for you. As for the time, don’t think that debt settlement happens overnight. It takes an average of 2-3 years to complete an entire process of debt settlement. For some people, it could take less than a year though.
However, a lot of borrowers still consider going in for debt settlement as opposed to bankruptcy because the latter hits the credit ratings for a decade at least.
About the author
Lydia has been working as a credit counselling specialist with a company offering debt relief services for the last decade. She has negotiated and counselled numerous clients about their financials. Lydia likes glass painting as a hobby when she has time to spare.