For people drowning in debt and facing a financial crisis all at the same time, debt settlement is the way out. It sure does serve as a new lifeline but only if done the right way by the right people. The debt settlement industry is growing at a rapid pace because this financial strategy really can help resolve your financial obligations. However, there’s a dark side to it too that no one talks about. The side that can lead people to even more debt, financial distress, lawsuits and ruined credits.
Before you start your debt settlement journey, it’s important to know both the good and the bad sides of the industry. Today, we are going to talk about some real life horror settlement stories that’ll serve you as a lesson on how to protect yourself against such misfortunes.
What’s A Debt Settlement Negotiation?
In a debt settlement, you or a third party negotiates with your creditor to accept a lump sum payment that is less than the original debt amount. If the creditor agrees to the offer, he will reduce the debt amount and waive off a certain percentage. The process comes with substantial savings but the journey is tough, it can take you around 2 to 3 years to reach a settlement agreement and it comes with certain risks that can sometimes do more harm than good.
Real Life Debt Settlement Horror Stories
1-Emilia’s Credit Nightmare
Background: Emilia, a single mother from Texas enrolled in a debt settlement program. She owed a total of $25000 in credit card debt. As per the advice of her settlement agency, Emilia stopped paying the creditors.
Horror: Within months, her credit score went from 700 to 450. The collection agencies started calling her relentlessly and eventually the creditors sued her. All of this happened because the settlement company wasn’t able to settle her debt with the creditors on time. Eventually she ended up paying more in legal fees and judgments than her original debt.
Lesson: You should only stop making payments to your creditors when the agreement is in place. Taking any such decisions before can damage your credit. Credit damage and lawsuits usually spiral out of control quickly when not taken care of.
2-John’s Tax Shock
Background: John hired a debt settlement agency and the agency was able to successfully settle his debt of $30,000 for $12000.
Horror: The same year, John received a 1099-C form from the IRS stating that the forgiven amount of the debt is taxable income. He had to pay $5000 tax which wasn’t manageable for him.
Lesson: If your creditor has forgiven more than $600 of debt, it’s considered as taxable income by the IRS and you should prepare for that earlier.
3-Bob And Linda’s Marriage Strain
Background: The couple had a $40,000 debt combined and after seeing an ad online, they hired a debt settlement company.
Horror: For over a year, the couple paid the company $500 and most of it went to fees. During this entire time, their creditor didn’t receive any payment and hence the interest started accruing. Eventually the creditor started garnishing Bob’s wages.
Lesson: Not all debt settlement companies are legitimate and trustworthy. Always look for companies that are accredited by the AFCC and make sure to read the online reviews first before finalizing a company.
4- Mark’s Identity Theft Nightmare
Background: Mark signed up with a debt settlement company that promised to eliminate his credit card debt worth $20,000 in 18 months. The company told Mark that they require his social security number along with bank access in order to resolve the debt.
Horror: After six months, Mark started noticing that suspicious withdrawals were made out of his account. Turned out that the company he was dealing with was a fraudulent company that was draining his accounts. Eventually he ended up in more debt than before and it took him years to restore his credit.
Lesson: You shouldn’t ever rush when hiring a debt settlement company. Do your due diligence, read reviews on platforms like Better Business Bureau and never share any of your personal financial information with anyone.
5-Fiona’s Hidden Fee Trap
Background: A woman named Fiona paid $300 every month to a debt settlement company. After a few months, she was told that every penny went to fees and not even a single dollar was paid to the creditor.
Horror: When the actual negotiations started, her account was already in default. She had to deal with multiple penalties and her debt of $15000 became $25000. She had to go through a lot of stress due to aggressive collection calls and legal threats. Eventually she was forced to quit the program and she decided to file for bankruptcy.
Lesson: Companies often scam people with hidden fees. You should always know how much of the amount is going into fees and how much is going to your creditor. For this, it’s extremely important that you read the contract properly and ask questions before signing up with a settlement company.
Tips For A Successful Debt Settlement
If you want to protect yourself from such horror incidents then it’s best to first study debt settlement in detail and ensure that it’s just the right option for you. Debt settlement comes with its own downsides just like any other debt relief strategy. You’ll have to face the complications including credit score damage and sometimes, lawsuits too. It’s just that if you follow the right path and use the right debt settlement company, things will get a lot easier for you. Here are some useful tips to use;
Create A Plan: You first need to figure out your financial situation. For debt settlement, you require a lump sum amount and that’s the first thing you need to prepare for. Make a budget, set aside some amount every month and once you have enough funds, start a negotiation with your creditor.
Always Hire A Reputable Settlement Company: Hiring a settlement company is the wiser decision here as these people have just the right expertise that you need to resolve your debt. However, you shouldn’t rush the decision and take your time instead. Make sure to do proper research and ensure that you are hiring a trustworthy company.
Stay In Touch With Your Creditor: Even after hiring a settlement company, you should stay in touch with your creditor and keep track of the company’s progress at the same time. You should know how far they are into the negotiations with your creditor and what possibly will be the outcome.
Monitor Your Credit Score: Your credit score will be damaged in a debt settlement negotiation mainly when you stop making payments to your creditor. It’s important that you keep monitoring your credit score and in case you see any errors or indiscrepancies, dispute them with the authorities.
Overall Verdict
Debt settlement is a great financial strategy but only in specific and controlled situations. You should only consider it when it’s your last resort and the only other option you have is bankruptcy. Bankruptcy can do more harm than debt settlement which is why this is the better option. It does damage your credit but you sure can take measures to rebuild it with responsible credit behavior in the long run. Other than credit damage, you can be subjected to a lawsuit too which is why you should keep yourself prepared for such situations. It’s best to first talk to a financial counselor before taking any such crucial decisions.
FAQs
Q1.Will Debt Settlement Hurt My Credit Score?
Yes, debt settlement will hurt your credit score mainly because of stopping the payments to your creditor. Even after the settlement, it can take you years to repair the damage. To reduce the damage, you can request your creditor to mark your account as “paid in full”. If he agrees, it will have a lesser negative impact on your credit. If not then the settled account will stay on your report for seven years.
Q2.Can I Get Sued During The Settlement Process?
Yes, creditors can sue you anytime during the settlement process mostly when you stop making the payments. A lawsuit can then lead to wage garnishment or bank account levy. To ensure that no such thing happens with you, it’s best to work with a financial counselor by your side.
Q3. How Long Does Debt Settlement Take?
Debt settlement can take anywhere between 2 to 4 years. It mainly depends on the total amount of debt you owe, the lump sum you are willing to offer and how cooperative your creditor is.
Looking for a reliable settlement company that can resolve your debt without any hassle? Try our services at Mountains Debt Relief. We have just the right experience and expertise you need for a seamless debt settlement.