Debt Settlement – Is It For Real?

You’ve all heard the commercials lately promising to settle your credit card debt for pennies on the dollar.  Some of them make it sound like their services are part of some government credit card bail-out program.  Many of these companies claim that this will not have a negative impact on your credit, and that they can even remove negative information from your credit report.  I decided to research this more to see if these companies are legit.  What I’ve found out is that you need to be very careful before you sign up.

Paying off debt

Debt settlement is in fact something that creditors will consider.  However, most will not consider it unless they believe that there is no way that you can pay the entire debt back to them.  This means that first, you need to be delinquent on your payments, typically about 120 days or more.  If you’re that behind on your payments, you’re going to have substantial late fees and finance charges.

The Fees

Next, these companies typically require that you pay them 25% of whatever they are able to get the credit card company to forgive.  So let’s say that you owed a total of $10,000 to credit card companies, and your debt settlement got them them to forgive 1/2 of it.  Your fee to the debt settlement company would be $2500.  Once you add on the extra late fees and finance charges from the credit card company, you will likely pay a total of about $0.84 for every dollar owed.  Now that may sound like a good deal, but wait, there’s more!

The Taxes

That amount of forgiven debt that you didn’t have to the credit card company wrote off as bad debt is going to be taxable to you by the IRS.  What you didn’t pay back to the credit card company and to the debt settlement company, you will likely pay to the IRS in taxes.  Looking worse all the time, isn’t it?

Damaged Credit

Now to top it all off, notations will be made on your credit history that those accounts were “settled” or “settled for less”, which is a big black eye on your credit.  Potential employers, landlords, insurance companies, etc. will look at that and assume that you’re not the kind of person who can be trusted to pay back all of their debts.  However, it may be possible to get the creditor to notate the account as “paid in full”, which would be much better.

The National Consumer Law Center completed an investigation of debt settlement companies. The center cautioned: “Debt settlement assistance should be allowed only when consumers have already saved money or otherwise have the money to attempt to settle a debt and are seeking assistance with negotiation.” The center also concluded: debt settlement “that requires consumers to stop paying creditors, save money in reserve accounts, and pay large fees does not benefit consumers.” 

Getting out of debt is never simple or easy, and there are companies out there who will prey on those who are trying to get out of it.

Bottom line:  debt settlement is not as simple or as beneficial to consumers as the radio and TV commercials make it sound.  Do your homework and be careful before considering working with a debt settlement company.  Proceed with caution!

Enjoy your day!

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