Frequently Asked Questions
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Can Debt Settlement Really Allow Me to Pay Back Less Than I Owe?
If you are struggling to pay off your credit card debt, medical bills, or other unsecured debt, you may be wondering if the advertisements you see on the TV, radio or the Web are for real.
The main questions consumers ask are:
“Can I really get out of debt for a fraction of the cost and pennies on the dollar?
Will debt settlement help me get out of debt quickly, legally and safely?
What are the effects on my credit rating and future ability to get a loan?
Below you will see a variety of questions and answers that we wanted to share with you. These are among the most commonly asked. By reading on, it is our hope that you’ll be able to make an intelligent decision as to whether debt settlement is the right choice for you.
What Is Debt Settlement?
Debt Settlement (also referred to as debt negotiation, negotiated debt settlement or sometimes incorrectly called debt consolidation) means that your debt is negotiated down to a reduced amount and paid off in a lump sum. In some rare cases, multiple payments are utilized to pay off the debt, settling the account in full. In most cases, when you hear that debt can be paid off for pennies on the dollar, you are being misled. While in very rare cases, some debts can be settled for this very low figure, typically debts are settled within the range of about 15 – 75 cents on the dollar.
Settlement is one of the most effective choices available to consumers. It’s a great choice if you have more debt than you can pay off in a 2 – 3 year time frame or are experiencing a financial hardship that has you falling behind (or just about to be) on your monthly payments. Why would creditors choose to settle debts rather than simply charge you interest and late fees over and over again? Well, it’s really a matter of dollars and good sense. Creditors know that if you get into such a bad financial position that you can’t pay your monthly payments, you may decide to declare bankruptcy or simply do nothing. In this case they may get nothing! Therefore, they are usually very willing to settle for a lower amount, given your hardship, than risk getting nothing at all, especially with a bankruptcy among the alternatives.
Bankruptcy may allow you to eliminate most of your debts quickly and this is typically referred to as a “Chapter 7 Bankruptcy.” In other cases, you may be required to pay back a percentage of your debts over time. This is typically referred to as a “Chapter 13 Bankruptcy.” Bankruptcy also offers legal protection under the court so that you don’t have to worry about being sued or harassed by creditors while completing the bankruptcy process. While most reputable debt settlement firms will work to assist in minimizing creditor calls and harassment where possible, debt settlement does not provide the guaranteed legal protection that bankruptcy does.
Chapter 7 bankruptcy is not an option for everyone and it has gone through some changes since the bankruptcy reforms of 2005. Unlike the not so distant past, it has become more difficult to qualify for full liquidation (forgiveness) of your unsecured debts. Chapter 13 bankruptcy requires five years of court-ordered payments to atrustee, and may require you to surrender some of your assets.
However, as getting all of your options will help you make a more informed decision, speaking to a bankruptcy attorney may be a worthwhile discussion. Most reputable debt settlement firms can refer you to a trusted bankruptcy attorney if you have detailed questions or if they determine that you might be better served by speaking to them instead. Typically, if you are in such a financial state of hardship that you can’t even make your minimum monthly payment into our program, speaking to a bankruptcy attorney is highly recommended.
What Makes Me a Good Candidate for Debt Settlement?
There are a few factors that a well-trained debt specialist can go over with you in more detail. In general, if you can afford to pay back your debts on your own by paying more than the minimum payment every month without hardship, it’s probably the best route. It will not impact your credit score (and may improve it), and it will likely be relatively pain free. For those in true (or soon to be) financial hardship, debt settlement from a trusted and time-tested organization is a better option. If your total unsecured debt balances are less than $10,000, Consumer Credit Counseling is an excellent choice as your payments can be consolidated into just one, and typically, interest rates are reduced on your accounts. However, be warned. Many counseling programs have a very high drop out rate, can last up to 5-7 years, and you end up paying back 100% of the debt you owe, plus any new interest.
Will Debt Settlement Affect My Credit Score?
If you are current on your payments, it is very difficult, if not impossible to settle your debt. Creditors typically want to see that you are in a hardship situation before they are willing to negotiate. Therefore, you will have to voluntarily stop paying your unsecured debts; allowing them go into delinquency before settlement. In addition, you cannot pick and choose which debts you wish to settle in most cases. Your creditors and/or collections agencies may review your credit report, and most will be unwilling to negotiate when they see that they are being offered less than what is owed to them while others are being paid on time as agreed. Secured debts, such as a home loan or car loan are collateralized; you should continue to pay these accounts on-time to avoid repossession or foreclosure proceedings.
By not paying your creditors, your credit will be adversely affected by debt settlement. However, having to experience this circumstance may be better than having to file for bankruptcy, especially on your credit rating. During your debt settlement program, your total balances are being lowered over time as they are settled in full – a great start to recovery!
How Will Debt Settlement Affect My Taxes?
In general, in the United States, the IRS considers debt which is forgiven as income. This means if you borrow $15,000 on your credit cards and settle it for $8,000, the $7,000 difference is taxable as income since it is not repaid. However, the IRS will often waive this tax liability if you can show that you were insolvent during the time in which your debt settlement took place. We highly recommend a quick call to your accountant or tax professional for further discussion. You may be relieved with what they have to say!
There are always very clear and real responsibilities when dealing with debt, especially when you don’t pay back 100% of what you owe. However, once you can remove your debt problem from your life, a whole new world of opportunity can open up for you.
Contact Us at (800) 857-0181 for a Free Debt Analysis