Debt Management – Should You Consider Debt Settlement?
When considering debt settlement, you should be aware of the risks and regulations. The FTC and state consumer protection agencies may want to check the company’s license and history. Consumers should also avoid companies that have false online reviews, which may be paid advertisements. Fox also recommends reading the Federal Trade Commission’s “Coping With Debt” page before signing on with a debt settlement company. Lastly, never pay for a debt settlement service before receiving a formal offer.
Debt settlement firms charge a fee based on the amount you owe when you first enroll in their program. The fees are not applied to the debt, but to the total settlement amount, so that the savings are eliminated. A settlement process can lower your credit score by up to one hundred or two hundred points, and your debt settlement savings can be as high as 50% of your original debt. Although this sounds great, it’s important to understand that there are risks associated with settling your debts.
If you miss a payment, you may be eligible for a lawsuit. If you choose not to settle, your creditor may sue you or report it to the credit bureaus. While your creditor may agree to a settlement, you won’t receive any payments from them for at least six months. This delay will affect your credit score and may result in collection calls. The best way to avoid these risks is to avoid using debt settlement services altogether.
In some cases, debt settlement may be your best option, especially if you are months behind on your payments. However, if you’re a month or two behind on your payments, credit counseling may be the best way to get your finances back on track. There are many financial education nonprofits offering credit counseling for free. The benefit of credit counseling is that you’ll have one-on-one access to a qualified counselor who can offer tips on how to make future payments.
While debt settlement is a better option than bankruptcy, it can still be costly. Debt settlement firms will charge you a fee for their service, but you’ll be saving yourself a lot of money in the long run. You should also consider debt settlement as an alternative to bankruptcy if you can’t make your payments. But be careful of fraud when using debt settlement services. If you’re not careful, you may end up in trouble with the IRS. The last thing you need is a bankruptcy that can ruin your credit.
Debt settlement is different from debt management. A debt management program will help you reorganize your finances so that you can make smaller monthly payments. A debt management company will negotiate with creditors for a reduction in interest rates or extended repayment times. The aim is to minimize the damage to your credit. Debt settlement companies are not for everyone. In fact, some of the best debt settlement programs don’t even pay off your debts at all.
Before choosing a debt settlement company, ask them about the fees they charge. These fees are often a flat fee or a percentage of the amount you’ll save. It’s worth keeping in mind that you’ll need to make some payments to the settlement company as well, so be sure to ask about these fees before choosing a settlement firm. Once the company accepts the settlement offer, the account will be closed and cannot be reopened.
Before choosing a debt settlement company, you should understand what your credit score will look like. A debt settlement company’s instructions to the creditors will affect your credit score negatively. If the settlement amount you’re offered is less than you owe, your credit score will suffer. If your credit score is lower than it was before, you’ll have trouble getting loans. If your debt settlement company can’t prove that it can pay off your debt, your credit score might go downhill.
Another risk involved with debt settlement is that the forgiven amount is taxable. Forgiven debt is viewed as taxable income by the Internal Revenue Service (IRS). This means the creditor will have to issue a 1099-C tax form to you for “forgiven debt amounts” of $600 or more. The form will list the forgiven amount in Box 2 and interest in Box 3.
When it comes to credit score, debt settlement can be just as damaging as bankruptcy. It will remain on your credit report for seven years and may ruin your credit. Debt settlement will leave a negative mark on your credit history and affect your credit utilization ratio. As a result, it is important to know your credit score before entering into any kind of debt settlement deal. If you choose a debt settlement company, be sure to contact your state attorney general’s office to see if it is reputable.