Monday, February 9, 2015

When is Debt Settlement a Good Idea?

Debt settlement services are certainly not for everyone, and the industry is still very unregulated, but it is worth considering in some cases. If you decide to turn to debt reduction services, make sure you exercise extreme caution and do your homework before working with a company, or even a debt settlement attorney, to avoid being taken advantage of.

Settlement allows you to pay less than your balance by negotiating with your creditors for a smaller amount to satisfy the total debt. While this may sound like a great solution to help you overcome a mountain of debt, there are serious consequences. Debt settlement companies appeal to consumers who are very troubled by debt but wish to avoid bankruptcy at all costs - and all costs is right. Not only is this service very expensive, it will also do serious damage to your credit.

Potential dangers of debt settlement include:

• Fraud: There are some companies who offer debt settlement services who are no more than fly-by-night scams, taking huge upfront (and illegal!) upfront fees and disappearing. Other debt settlement companies are simply too inexperienced to effectively negotiate a deal, or even bother. Either way, your money is wasted at a time when you cannot afford the loss.
• Damage to your credit: Debt settlement companies will require you to stop paying your bills to build up a lump sum for settling, and to get leverage, but this comes at a cost. Your credit will be tanked, and the higher your score to begin with, the harder the hit. Successfully settling debts also hurts your credit.
• Lawsuits and wage garnishment: Creditors will often escalate their actions against you when you obtain debt reduction services from a company. This means they are quick to file a lawsuit when you default, which can lead to a lien against your property and wage garnishment. In many cases, creditors will immediately take legal action when they find out you're working with debt settlement companies.
• No regulation: The federal government does not regulate debt settlement companies and the few rules they have in place are largely ignored. Proceed at your own caution.
• Taxes on forgiven debt: The IRS will usually consider the difference between what you owe and what you settle for as taxable income. This means you may owe about $2,500 in taxes for every $10,000 that's forgiven.
• Cost. Debt settlement is very expensive, and some companies will charge 14-18% of the total balance that you want settled, while some will want a huge percentage of the amount they successfully settle.
• Time involved: Finally, debt settlement is not a fast process and the average debt settlement process is longer than two years.

When Does it Make Sense?

So, when does attempting to settle your debt actually make sense? If you can afford your debt but only if the amount is reduced, attempting to settle may be a good option. In general, settlements should be used if you can't qualify for Chapter 7 bankruptcy (or cannot afford to do so because of your job), if you accept that your credit will take a big hit and you understand that you may be on the hook for paying a lot in taxes and fees.

If you're thinking about turning to debt settlement, consider working with a debt settlement attorney versus a non-attorney company as they can represent you in court if your creditors sue you, and they will offer better leverage in dealing with your creditors.

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