Debt Settlements

Will Debt Settlement Work For Me?

Debt settlement is a service provided by third-party businesses that negotiate settlements with your creditors or debt collectors to decrease your debt. 

However, there are dangers to be aware of.

While it may be tempting to utilize a debt settlement agency to help you pay off your debt, bear in mind that you may wind up in even more debt or harm your credit.

Here’s everything you need to know about debt settlement, including how it works, the benefits and drawbacks, and how it may impact your credit.

How Does Debt Negotiation Work?

Debt settlement firms are sometimes referred to as “debt relief” or “debt adjustment” firms. In most cases, the businesses will contact your creditors on your behalf to negotiate a better payment plan, settle or decrease your debt. They usually charge a fee, a percentage of the money saved on the resolved debt.

The business may attempt to make a lump-sum payment with your creditor less than the whole amount you owe. They may ask you to make regular deposits in your control account but managed by a third party while they negotiate. You utilize this account to put money aside for that one-time payment.

The debt settlement firm may advise you to cease paying your creditors while negotiating until a debt settlement agreement is achieved.

You must agree to the debt settlement agreement and make at least one payment to the creditor or debt collector for the settled amount after the debt settlement business and your creditors reach a deal — at the very least, altering the conditions of at least one of your obligations. The debt settlement firm may then start charging you for its services.

Keep in mind that there’s no assurance that the business will be able to settle all of your obligations with you.

Benefits and dangers of debt settlement

There may be certain advantages to debt settlement, but you should also evaluate the dangers.

The advantages

Using a debt settlement firm to settle debt may…

  • Reduce the amount of debt you have.
  • Assist you in avoiding bankruptcy
  • Get your creditors and debt collectors to stop bothering you.

The dangers

However, the dangers may exceed the advantages.

1. Your creditors may refuse to deal with you.

Not only is there no assurance that the debt settlement firm will be able to settle all of your obligations effectively, but some creditors may refuse to engage with debt settlement firms at all.

2. You may find yourself in much more debt.

You may be charged late fees or interest if you cease making payments on a debt. A creditor or debt collector may try to collect money from you or launch a lawsuit against you. 

Furthermore, suppose the business is successful in negotiating a debt settlement. In that case, the forgiven part of your debt may be deemed taxable income on your federal income taxes, which means you may have to pay taxes on it.

3. You may be charged fees even if your debt isn’t completely paid off.

Debt settlement firms can’t charge you a fee until you’ve agreed to the settlement and you’ve made at least one payment to the creditor or debt collector as a consequence of the arrangement. 

According to Bruce McClary, senior vice president of communications at the National Federation for Credit Counseling, you may still wind up paying a percentage of the debt settlement company’s entire costs on the remainder of your unpaid bills.

“If you have five or six creditors and the business settles one of them, they may charge a fee as soon as they have a resolution,” McClary explains.

A debt relief business might charge you the same percentage of its entire cost if it resolved a “part” of your total debt enrolled in its program. 

4. It may harm your credit.

A debt settlement firm may advise you to cease paying your bills while you save up for a lump-sum payment. However, your creditors may not have agreed to anything at this time, which means that all of the expenses you’ve missed will appear on your credit reports as overdue accounts.

Your credit scores may suffer as a consequence of late payments, and your creditor may send your account to collections or sue you for the debt.

Our top choices for debt relief

Because of the dangers, we don’t suggest debt settlement as a first choice. However, if you’re searching for debt settlement services, some may be more suited to your needs than others. Our selections have a proven track record of assisting clients in effectively settling debts while staying adaptable to their unique requirements.

ConsolidationNow

Why does ConsolidationNow stand out from the crowd?

ConsolidationNow is a debt management business that offers its customers’ debt settlement and negotiation, budgeting tools, and credit score monitoring.

  • Debt relief that is adaptable — ConsolidationNow claims that it may contact creditors on your behalf to discuss debt solutions due to and that any solution offered by ConsolidationNow is voluntary.
  • Charges — To utilize ConsolidationNow’s services, you must pay a monthly subscription (about $17). If you want to begin a debt management program, the agency will connect you with a credit counselor from its network. 

Although ConsolidationNow does not charge a fee for each debt settlement service you utilize, the companies with which it partners do. Depending on which of ConsolidationNow’s partners you deal with, your costs will vary.

  • Tools for keeping track of your money — ConsolidationNow provides credit monitoring and budgeting features to users to help them manage their spending, so you may find the app helpful even after your debt is paid off.

Debt settlement alternatives

 

1. Handle your settlement negotiations.

On your own, try negotiating with credit card issuers or other creditors. Even if it’s less than what you owe, offer an amount you can pay right away.

2. Make a balance transfer

Consider a balance transfer if you have credit card debt. A balance transfer is when you transfer debt from one credit card to another, often to take advantage of the new card’s initial 0% interest rate offer.

Balance transfer cards usually feature a 0% intro APR offer for a certain period and may levy a flat fee or a percentage of the amount transferred.

Check if you’ll spend more money on your existing card’s interest payments than the cost of any balance transfer fees to see whether a balance transfer is a smart option for you. To prevent paying interest on your debt, you should attempt to pay it off before the promotional period on your card ends.

3. Seek credit counseling from a non-profit organization.

Nonprofit organizations may provide credit counseling services, such as budgeting and debt management guidance, for free or at minimal cost. Credit counseling organizations do not usually negotiate debt reduction. On the other hand, a credit counselor may work with creditors on payment arrangements or eliminate late penalties or collection calls.

If you decide to proceed with debt settlement, here are the following steps to take.

Do your research. By attempting to prohibit unfair corporate activities in the marketplace, the Federal Trade Commission works to safeguard consumers. The Federal Trade Commission (FTC) provides helpful information on debt settlement that you should study as you evaluate your debt settlement alternatives.

Choose a trustworthy debt settlement company. The Consumer Financial Protection Bureau advises calling your state attorney general and local consumer protection agency before enrolling in any debt settlement program to see any complaints on file. 

The state attorney general’s office may also determine if the business is required to be licensed and whether it satisfies your state’s criteria.

Consumer evaluations of companies may be found on the Better Business Bureau’s website, which might assist you in your search for a debt settlement service provider.

 

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forgiven debt
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