It’s an undeniable fact that debt comes with a whole lot of emotional and financial burden. Especially if your current financial situation isn’t really up to the mark and you are struggling with your monthly repayments then debt settlement really seems like a big relief. It’s a wise move especially when your interest is already soaring and you are constantly bombarded with collection calls. This is where debt settlement companies come into action. They know how vulnerable you are, they know you want a quick and easy way out and that’s why they start making promises to slash your debt and provide complete financial freedom. But is it really true? Are their claims legit?
Let’s explore all what debt settlement companies offer, what they don’t tell you and what they can really do. All these details are of utmost importance especially before you sign up with a company!
What Is Debt Settlement And How It Works?
Debt settlement is a debt relief strategy where you negotiate with your creditor to reduce your debt. In return you have to pay your creditor a lump sum of the total amount or you can pay it off in monthly installments (depending on the agreement).
For starters, you should be aware that no creditor is under any obligation to accept your settlement offer. It’s a what and if situation and there is no guarantee. Even if you hire the most reliable debt settlement company, they can’t guarantee you if your creditor will agree on your settlement terms. This also raises the concern of a lawsuit. Your creditor can sue you during the settlement negotiations based on your missed payments.
Here’s what debt settlement companies usually do;
- Ask you to stop paying your creditors
- Ask you to save those payments into a separate account
- Use those funds to offer a lump sum to your creditor
- Collect a fee for their service after the settlement (it’s often a percentage of the debt settled)
You might wonder, why would a creditor agree on reducing your debt? Well, it’s simple! Creditors would prefer getting something out of you instead of nothing especially when they know that the only other alternative you have is default.
Settlement Companies Can’t Guarantee You Results-Here’s Why!
Debt settlement companies usually try to trap their customers by making big bold claims like eliminating your debt completely. Well, the truth is that no company can guarantee any outcomes in this case. No matter how persuasive and convincing their success stories sound, you shouldn’t fall victim to their words or marketing tactics.
Here’s why there’s no guarantee of a successful debt settlement;
1-Creditor’s Are Under No Obligation To Settle
As said earlier, your creditor can reject your settlement offer just as they like, especially because they aren’t legally bound to reduce your debt. In fact, most of the secured debts and private student loans rarely settle because some creditors just choose the traditional way to collect their money and some even prefer taking a legal action.
Here’s what companies don’t tell you: They pitch the settlement rates just to convince you to sign up and most of these rates are based on their past outcomes but there’s no guarantee at all whether the deal will go through or not.
2-Debt Settlement Will Negatively Impact Your Credit
Even though debt settlement is a great financial strategy, it still does come with a few major downsides and one of them is the negative impact on your credit score. Your credit score will suffer a major dip when you stop making payments to your creditor (which is a part of the debt settlement process). Moreover, even if you are able to settle your debt with your creditor, it’ll show on your credit report for 7 years and this can limit your financial opportunities.
Here’s what companies don’t tell you: Even if the company is able to successfully settle your debt, it’ll show on your credit report for years and eventually it’ll limit your access to new loans with better interests. It might even affect your ability to get a job, a new house or a new car.
3-You Can Get Sued
While you build your funds for the settlement, your creditors can sue you and in case they win, they can garnish your wages and even place liens on your property.
Here’s what companies don’t tell you: Debt settlement companies cannot stop your creditors from any legal actions neither can they protect you from any aggressive collection tactics.
4-The IRS Can Tax You
If your creditor forgives more than $600, the IRS considers it as taxable income and you’ll have to pay it no matter what.
Here’s what companies don’t tell you: A $10,000 forgiven debt means that you’ll have to pay thousands to the IRS as tax. The surprise tax bill can become a real burden for you if you haven’t prepared for it earlier.
5-Their Fees Can Eat Up Your Savings In The Settlement
It’s obvious that you’ll have to pay a fee to debt settlement companies after they’ve successfully negotiated with your creditors. Some companies charge around 15% to 20% of the total amount of debt which means that eventually, you don’t really save anything in the settlement process.
Here’s what companies don’t tell you: After the fees, you’ll not be able to save anything and even if you do, the amount will be really negligible.
Red Flags To Look Out For When Hiring A Debt Settlement Company
The settlement company you choose can literally make or break your financial life. In a settlement, your goal isn’t just to get rid of your debt but you’d also want to save some money in the end. This is why it’s very important to sign up with a reliable company that really does keep its words. To prevent getting scammed, here are some major red flags that you need to look out for;
1-False Promises Of Guaranteed Results
You have to be very realistic when hiring a debt settlement company. Most scam companies will make unrealistic claims and false promises to lure you into their trap. They might as well tell you how they can eliminate your debt entirely which is never true and it never really happens. The outcome of a debt settlement is never guaranteed whether you do it yourself or hire a third party settlement service.
2-Demanding Upfront Fee
A reliable and reputable settlement company won’t ever demand any upfront fee. They’ll charge you only when the debt has been settled or resolved with your creditor. If a company is asking you for any “small fee” before starting the negotiations then it’s a red flag and you shouldn’t work with them at all.
3-Not Disclosing Any Risks And Consequences
Debt settlement is no magic. Your debt won’t reduce without any consequences. A company that’s hiding the negative impact of debt settlement and not informing you about the legal risks involved is definitely a scam. A professional company will explain all the pros and cons of the process before asking you to sign up for anything.
Final Thoughts
Debt settlement is not as simple and easy as it seems which is why you should only opt for it as your last resort. If you really are in financial distress and don’t see a way out then yes, you sure can give it a try but with caution. Especially when hiring a debt settlement company, you should do your due diligence and ensure that you are hiring the right people for the job. Don’t fall victim to false marketing tactics and know that no one can guarantee you the outcome of a debt settlement. It all depends on your creditor, the total amount of debt and the lump sum you are willing to pay.
FAQs
Q1.Will Debt Settlement Affect My Credit Score?
Yes, debt settlement will have a negative impact on your credit score especially due to the missed payments. Once the debt has been settled, it’ll stay on your credit report for 7 years which means you’ll have limited financial opportunities.
Q2. Do I Have To Pay Taxes On The Forgiven Debt?
Yes, if the amount your creditor forgives exceeds $600 then the IRS considers it as taxable income and you’ll receive a 1099-C form for it. You should consult with a financial counselor before getting into debt settlement to know all about taxes so that you don’t get shocked with a surprise tax bill.
Q3. Can All Kinds Of Debt Be Settled?
No, not all debts can be settled. Debt settlement is only for unsecured debts like medical bills, personal loans and credit card bills. You cannot settle secured debts like mortgages with the help of a debt settlement company.
Worried about finding the right debt settlement company that can help you resolve your debt realistically? Try our services because at Mountains Debt Relief, we believe in transparency and clarity with our customers!