Debt Settlement Companies and Programs
Debt settlement companies and programs are a niche market. Many of the consumers who turn to debt settlement companies do so to improve their financial situation. These consumers find paying a debt settlement company preferable to managing their own debt or filing for bankruptcy. Let’s examine the facts about debt settlement companies and programs.
The Facts about Debt Settlement Companies and Programs
Debt settlement is not the same as debt consolidation or debt management. Debt settlement is an effort to negotiate a lower repayment for each creditor in the form of a single lump sum payment.
The debt settlement company places your monthly payments, minus their service fees, into a trust account while they negotiate a settlement offer with each of your creditors. After reaching an agreement, each creditor is paid, as the appropriate lump sum of money is available in your trust account. This could take years to accomplish.
Debt settlement programs are often negotiated for as much as 50% of the original balance. Depending on the total amount of your acquired personal debt, a 50% savings could make working with a debt settlement company seem very attractive.
Most debt settlement companies charge a high set-up fee in addition to monthly fees. The total amount of fees paid to a debt settlement company is usually around 10-15% of your total debt to be negotiated.
A debt settlement program does not provide for regular monthly payments while the negotiation process takes place and while your account accumulates the appropriate lump sum for each creditor. This means that collection activities, late fees and additional charges continue to proceed on each of your debt accounts.
Debt settlement companies also generally do not provide any form of credit counseling or money management skills training for consumers seeking debt relief.
Going It Alone
While many consumers attempt to strike debt settlement offers on their own, they often find that many creditors will not even discuss a debt settlement offer until the account is several months past due. Additionally, many creditors will not settle with the consumer directly. These accounts will usually qualify for a settlement offer once they have been referred to a collection agency that has been unsuccessful in collecting any payments for a set period of time. This delicate timing is best handled by a professional, but be prepared to pay dearly for their services.
For some consumers, the thought of dealing directly with creditors is so unpleasant that they would gladly pay a debt settlement company to negotiate on their behalf- regardless of the fees charged.
Federal Tax Considerations
In addition to adversely affecting your credit rating, debt settlement can adversely affect your federal taxes for that year as well. Any forgiven debt in excess of $600 in any given tax year is considered taxable income. That means that the total amount of waived credit balances will be added to your taxes as generated income and are subject to income tax. This can seriously diminish your tax refund and in most cases, will result in taxes owed to the government.
Many creditors will wait patiently without filing legal action on an account. Often, once a creditor learns that a debt settlement company is involved with the account, they will seek immediate legal action to attempt to garnish your wages and collect more money on your account before the settlement deal takes place. Legally, creditors have every right to do this and a debt settlement company has no logical recourse.
Important Legal Note
Debt settlement companies are illegal in many U.S. states. Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming prohibit any debt management services from operating as a for-profit entity. All debt settlement companies are for-profit companies. However, this does not prevent debt settlement companies from attempting to operate in these prohibited states. You may still receive information about a debt settlement company attempting to operate remotely from another state. Not all companies are credible; you must research to find a reputable debt settlement company.
Who is a Candidate for a Debt Settlement Program?
For some consumers, hiring a debt settlement company is preferable to filing for bankruptcy, but this applies to only a small niche of the population. Realistically, only consumers who are left with no other choice than bankruptcy but who do not qualify for a Chapter 7 filing are good candidates for a debt settlement program. Consumers who are faced with filing for Chapter 13 bankruptcy must pay a percentage of the entire debt within 3-5 years. For these consumers, a debt settlement company may be preferable to paying legal fees and higher percentages of acquired debt.
Consumers who are terrified of negotiating directly with creditors and who can afford to pay debt settlement fees may also be satisfied with hiring a debt settlement company.
The Bottom Line
Debt settlement companies and programs are ideal for a small percentage of the population. If facing your creditors is unthinkable or if you crunch the numbers and find that a debt settlement company is cheaper than filing Chapter 13 bankruptcy in your case, you should seek out a reputable debt settlement company.