You’re overwhelmed with credit cards. You make your minimum monthly payments. Your balances never decrease. And you feel trapped in a hole with no end in sight. Sound familiar? You’re not alone. Many people in this situation are looking for the fastest way out. As they surf the web to look for debt relief options, they will most likely stumble across on an advertisement that says something along the lines of, “Reduce your debt by over 50%, cut your monthly payments in half!” On the surface, it sounds almost too good to be true. You decide to call a debt settlement company, and can’t turn down an offer to pay your creditors a fraction of what you actually owe!
Here’s the catch. Most debt settlement companies fail to tell you in detail all the pitfalls that are associated with the program. Don’t get me wrong, a debt settlement program is great for those who are suited for it. I’ve personally seen some creditors negotiate a settlement for as low as .20 on the dollar! Before you enroll in this type of program, it’s crucial to know what the downsides are.
What you need to know about a Debt Collection Settlement
- Collection Calls – Most debt settlement companies will tell you that they can stop creditor calls just by sending them a cease and desist letter. This is half true. According to the FDCPA (Fair Debt Collection Practices Act), a collection company must cease communication with the consumer if they sent a cease and desist letter. However, this only applies to 3rd party collection agencies. No one can stop the original creditor from calling you.
- Increase in balances- I’ve heard this statement way too often. A debt settlement company will tell you that they will negotiate on the balance at the time of your enrollment. However, many consumers fail to realize that once you stop making payments, late fees and penalties will be assessed. If you enroll an account that has a $2,000 balance, don’t be surprised if you see a balance as high as $3,000 at the time of settlement.
- Possible Legal Action- This is perhaps the scariest thing a consumer can go through. A sheriff delivers a court summons to their front door step, and now the creditor wants to sue the consumer. If a creditor wins a judgment, the court can order wages to be garnished or a lien attached to any personal property.
- Taxed on $$ Forgiven- Let’s say you owe $10,000 on a credit card. Your debt settlement servicer successfully negotiates a settlement at 35%. The amount saved ($6,500) may be taxable income. Any debt forgiven above $600 must be reported to the IRS.
- Credit Score– I thought I’d throw in the obvious as well. Enrolling in a debt settlement program will literally destroy your credit. You will have delinquencies on your credit as well as potential collection accounts.
After reading this, you might think that no one in their right mind should enroll in a debt settlement program. That’s not necessarily the case. Potential candidates for this program will have these characteristics:
- Judgment Proof- Just because you are judgment proof doesn’t mean a creditor can’t sue you. Being judgment proof simply means that a creditor cannot garnish your wages due to federal or state guideline and you have no assets.
- Insolvency- People who are insolvent (owing more than what they are worth) are good clients for debt settlement because they won’t be liable for the amount forgiven.
- Access to Emergency Funds- In case a creditor is willing to give a substantial discount on a card, you should have some kind of emergency funds (friends, relatives, family, etc) who will be able to help you out.
- Ability to complete program under 36 months- Anyone who cannot complete a program within 36 months in a debt settlement plan probably shouldn’t enroll. If it takes you more than 36 months, bankruptcy is probably the best option.
To summarize, each debt relief option has its pros & cons. It’s important to fully understand the ramifications of each program before you commit yourself. Debt settlement is a wonderful option for those who need to get out of debt, but only a certain percentage of people are good candidates for this type of program.