It may get confusing to sift through terms like debt management, debt consolidation and debt settlement. They may all sound alike. But they are not. There are subtle differences between how these different processes work that may make all the difference in the end to your debt problems. In this article you will speak of debt settlement how it works and the dangers of using debt settlement.
Debt settlement be sound a lot like a debt management plan but it’s usually not. And ideal debt management plan strives to lower your interest rate and give you better terms of repayment by renegotiating with your creditors. If you’re payments to the creditors are current then they usually stay current and you continue to pay your creditors through the debt management company every month according to the renegotiated terms of the loans.
However, a debt settlement company will usually deliberately stop payments to your creditors in order to reach negotiate better terms of interest.
If you have seen advertisements for debt settlement they usually read something like this:
” Reduce your debt by up to 60%. Get out of debt less than six months.”
while it is true that a debt settlement company might be able to cut down on the amount that you go to your creditors, it may or may not explain the exact way it is going to achieve this. Here is how debt settlement usually works.
How a Debt Settlement Company Works
During the initial contact with a debt settlement company you will be asked to provide the names of the creditors along with the amount of money that you go. After a preemptory calculation the debt management company will give you a figure which will be the new lower monthly payment you will be required to pay them. You will then be advised to stop paying your creditors and send the payment to them instead to settle the debts and make the payments on your behalf.
If you have not carefully gone over every inch of the process that the debt settlement company is going to undergo to settle debts then it is likely that is the first one to four payments that you make of them are going to go in their coffers as a fee for providing the service for you. After that the remaining payments are put away in an account to accrue. Depending upon the number of creditors you or the money to, the amount of the monthly payment you make, the debt settlement company will wait for a period of time which may be anything from 60 – 180 days before they contact your creditors in order to negotiate a settlement.
Do you realize what has just happened here? A debt settlement company has deliberately stopped paying your creditors in order to make your accounts late and delinquent. Many creditors will only negotiate a settlement once the account is late. Debt settlement company usually works on the principle that they have better leverage with creditors once the consumer payments have been delayed for a considerable amount of time. Plus delaying the payments for a few months enables them to put together a larger sum from your monthly payments in order to make one time settlements. While it is possible that a debt settlement company may be able to settle your debts, there is something else that has happened which may be damaging to your financial prospects in the future.
When a payment is delayed to a creditor of more than 30 days to creditors usually reports this to the credit bureau. If all of your payments have been delayed by the debt settlement company than all your creditors have properly reported your account as late for delinquent to the credit bureau. If your accounts were not already late this will cause a serious negative impact on your credit score damaging it for the years to come. You may find it difficult if not impossible to get further credit in the future till the time that this negative information is present on your credit report. Even then you may find that you need to build up a credit histories right from the scratch which may prove to be tedious and difficult. Credit history is not just about a good credit score but also about the depth meaning as to how far back your credit history goes. Ruining your credit history that might have taken years to build may be more of a price then you’re willing to pay.
During the time that the debt settlement company has stopped paying your creditors you might begin receiving collection calls as well which might prove to be a further harassment.
If the debt settlement company manages to settle the account with your creditors and delinquent information does not get removed from a credit report. It will merely get updated as “charged off settled” or “paid settled”, which tells the future creditors that you did not pay the amount borrowed in full. It may take you months or even a few years to get approval for further unsecured credit such as a credit card after you have been through a debt settlement.
You could owe taxes on settle debts as well. The Internal Revenue Service treats foreign debts as income and expects you to pay income taxes on it. Creditors are supposed to send you a form 1099 C. for reporting cancelled debts but even if they don’t you are still expected to include this form with the tax returns.
Alternatives to Debt Settlement
As mentioned before various processes like debt management, debt consolidation and debt settlement may sound alike but in fact quite different. If you are current on all your accounts or just a couple of months behind debt settlement may not be the right solution of you. If you have started having problems paying off your credit accounts recently or anticipates the problem to rise in the future than consumer credit counseling may provide with the help you need in managing your debts without damaging your credit rating. Entering a debt management plan that a credit counseling service may allow you to reduce the monthly payments to your creditors while keeping the status of your accounts current.
Consumer credit counseling is now viewed with a liberal perspective by many lenders and credit scoring models. Participating in a credit counseling does not have too necessarily hurt your credit rating as long as your payments continue to be made on time.
In theory anything that a credit counseling service can do for you you can do yourself. If you are having problems or are late with one or two creditors only then you may attempt will negotiate with them yourself. You creditors may already have a hardship programme for customers who are facing financial difficulty. You may be eligible for temporary reduction for a period of six months to a year in your monthly payment and interest-rate.