What is Debt Settlement?
The first step in debt settlement is hiring a debt settlement company. There are two types of debt settlement companies: attorney based and non-attorney based. In most instances, it is best to use a settlement process that is backed or operated under the guidance and support of lawyers.
With an attorney based settlement firm, any lawsuits will be handled on your behalf along with assistance for collection calls and/or letters. If you are not using an attorney based settlement company, you will be on your own for the lawsuits. Oftentimes, you will be on your own for the collection calls as well.
With debt settlement, you will start special-purpose savings or a third-party escrow account. You will make monthly payments into that account that only you have control over. As these deposits are accumulated, your creditors will be contacted by the settlement company’s negotiator. Each debt is negotiated or “settled” with your permission, the money you have been saving is used to pay off the agreed to debt balance.
During the time you are saving your funds, your credit report will be damaged, and your score will drop. This is common and to be expected.
Benefits of Debt Settlement
Using a debt settlement company to handle your debt with creditors could potentially:
- Lower your debt amount
- Help you avoid bankruptcy
- Get creditors and collectors off your back
Risks of Debt Settlement
As with everything, there are risks associated with debt settlement. In some scenarios, debt settlement can be particularly risky, and the risks can outweigh the benefits and make your situation worse.
- Your creditors may not agree to negotiate at all.
- You could end up with more debt or even a lawsuit if you stop making payments.
- Even if the company negotiates a successful debt settlement, the portion of your debt. that is forgiven could be considered taxable income on your federal income taxes.
- You may be charged fees by the debt settlement company, even if your whole debt isn’t settled.
- If you have 3 or 4 creditors and your debt settlement company settles debts with just one of those creditors, they can begin charging you for services.
- It will negatively impact your credit.
- A debt settlement company may encourage you to stop making payments on your debts while you save up money for a lump-sum payment. But at this point, your creditors might not have agreed to anything, which means you’re missing payments, and that can negatively impact your credit score.
What Are The Costs of Debt Settlement?
Attorney-based settlement companies do not collect any fees upfront. With this method, you stay in control of your money, you approve or deny the settlement agreements. Last but not least, be aware that forgiven debt can equal taxable income. The amount of debt that is forgiven may be treated as income, which means you will have to pay tax on that amount—this can be true to the extent of insolvency.
Mpowering America Can Help You Get Debt-Free
Our financial experts at Mpowering America encourage you to work with a reputable firm and a reputable tax professional throughout your debt settlement process. Wondering if Debt Settlement is the right option for you? Contact us today—the more you know, the more informed your decision will be.