Being able to get out of credit card debt can seem like a dream for any individual, especially if that person is barely able to make minimum payments on a monthly basis. If given the opportunity to get out of crushing debt, most individuals would take it. However, like so many things in life, if it seems too good to be true, it likely is. That is the case when it comes to debt settlement.
What Is Debt Settlement?
Debt settlement occurs when a creditor agrees to accept from the debtor less than what is owed on a debt. This lesser amount is then considered as payment in full on the debt, and any collections proceedings end at that point.
Normally, debt settlement is only available after the debtor has been late on payments, has missed payments, or the matter has been referred to collections. A creditor is not normally willing to accept less than the full amount if it is believed that the debtor is able to pay the full amount. The situation usually has gotten to the point that the creditor believes that getting any type of payment is better than nothing at all.
Debt settlement is used normally when it comes to credit cards or other types of unsecured debt, including medical expenses. Secured debts and student loans generally are not eligible for debt settlement.
How to Settle Your Debt
Debt settlement can include several different options. The debtor can work with the creditor directly or a the third-party debt collection company if the debt has been sold to collections. Debt settlement companies also exist that claim to help debtors work with creditors to reduce or negotiate down the debt. They do this by telling the debtor to stop payment on the debts and to pay into a savings account instead, dedicated for paying off the outstanding debts owed.
However, during this time, the payments pile up, as do the interest rates and delinquency notices. The debtor may take a serious hit to his or her credit during this time as the debt settlement company works on behalf of the debtor to pay off the amounts owed. No guarantee exists that the companies will be successful with settlement of all debts either, which can present a problem in the event the company is not able to settle. While it can be a good thing to finally rid oneself of a large amount of debt, settling on a debt also comes with its own set of unintended consequences.
Negative Risks Associated with Debt Settlement
If the debtor chooses to utilize the services of a debt settlement company, certain risks are associated with this decision. For one, since the debt settlement company will tell the debtor to stop paying on his or her debts, the risk is that not only will the individual’s credit take a serious hit, but he or she runs the risk of the matter being referred to collections, as well. Lawsuits may be filed. If the creditor gets a judgment against the debtor, that amount is locked in for purposes of owing on that debt.
In addition, debt settlement companies often tend to charge hidden fees. Even if the debt is settled and paid in full, most of these companies will also charge a fee on the debt they settle. There is also no guarantee that the debt settlement companies will be successful in paying off the debt owed. At the end of the settlement process, the debtor may still end up in the inevitable position of needing to file for bankruptcy. Going through debt settlement can be viewed as simply delaying the inevitable.
Another important consequence that is not always known has to do with taxes. Most debtors are not aware that any debt that is forgiven is considered to be taxable income. In fact, the IRS views the amount of money that is forgiven as income, a fact that the debtor may discover when tax season occurs. It is for this reason that a tax professional should be consulted if the person is considering settling the debt with the creditor directly. This professional can review the debtor’s situation to see if he or she will be safe when it comes to taxes that may or may not be owed after the unpaid debt is forgiven.
CONTACT AN ARLINGTON BANKRUPTCY ATTORNEY FOR A FREE CONSULTATION TODAY
An experienced Texas bankruptcy lawyer can help you explore suitable options for resolution of your debt and can help address any concerns you have about the bankruptcy process. Please call the Law Office of Marilyn D. Garner NOW at (817) 505-1499 to schedules for a free consultation to discuss how bankruptcy may help you to regain your financial health.