The average American household has more than $ 15,000 of credit card debt. Many of these families are struggling to make the minimum monthly payments and some are using plastic to cover daily living expenses such as food, transportation costs, and medical copays. Despite improving economic conditions, more and more credit card users are receiving phone calls and letters from creditors informing them that their payments are past due.
If you have too much debt and stress, now is the time to stop this destructive cycle and get the help you need from a debt reduction program. This article teaches you the principles of debt settlement, one of the most popular forms of debt relief.
What is debt settlement?
Debt settlement, also known as debt arbitration, debt negotiation, or credit settlement, is a debt relief approach in which negotiators communicate with creditors on your behalf to settle your debts in reduced, agreed-upon amounts. . Only unsecured debt (credit cards, medical bills, and personal loans) can be negotiated. You cannot pay off mortgages, rents, utility bills, cell phone and cable charges, insurance premiums, auto loans, student loans, alimony, child support, taxes, or criminal penalties.
Once you enroll in a debt settlement program, your negotiation team opens a trust account for you. You must deposit up to 50% of your unsecured debt in the account over a period of 24 to 60 months. This money is used to pay off your debts with creditors. Because the average debt settlement company is for profit, you also have to pay the company a 15-25% service charge. This fee is based on the original amount of your unsecured debt or the negotiated amount, depending on the debt settlement company.
Most debt arbitration firms use a third-party escrow service to “store” the money that they will then use to fund the settlements they negotiate for you. The most common escrow company is Global Client Solutions. Sending money to your trust account is usually done through ACH on the same day each month. If your checking account is with a bank where you also have a past due loan or credit card balance, it is suggested that you use a different bank for your debt settlement program.
Here are three things a debt arbitration company should tell you before you enroll in their program:
1. You must be provided with a written “initial estimate” of all costs associated with settling your debts in reduced, agreed-upon amounts.
2. You must be given an “estimated time” to reduce your debt.
3. You should be informed that debt settlement can negatively affect your credit score.
Here are some examples of what a debt settlement company cannot tell you:
“We can eliminate 50-70% of your debt.”
“We can pay off your debt for pennies on the dollar.”
“We can cut your debt in half.”
“Debt settlement will not affect your credit score.”
“Calls and letters from creditors will stop once you enroll in a debt settlement program.”
“Debt settlement does not affect your taxable income.”
“Once you join a debt settlement program, you no longer have to communicate with your creditors.”
If you are considering debt settlement, here is what you need to know first:
1. Debt settlement will not solve your careless saving and spending habits. The only way to achieve lasting financial freedom is to apply the dynamic laws of financial recovery to your daily life. These smart money principles will help you establish spending and saving habits that are built on a solid foundation. They are covered in a separate article titled “The Dynamic Laws of Successful Financial Renewal.”
2. Debt settlement should not be confused with bill consolidation, another form of debt reduction. Invoice consolidation, also known as interest rate arbitration, takes your credit cards and high-interest loans and consolidates them into a low-interest loan that you can afford. In other words, you are applying for a loan to pay off many others. Invoice consolidation does not reduce the outstanding balances you owe to creditors. Just lower your interest rates.
3. One of the main reasons people choose debt arbitration is to avoid filing for bankruptcy protection. Here are five reasons why the consequences of bankruptcy can be overwhelming:
Bankruptcy stays on your credit report for 10 years and negatively affects your credit score.
Bankruptcy will follow you for the rest of your life. For example, many applications for loans, credit cards, and jobs ask if you’ve ever filed for bankruptcy.
Bankruptcy cannot eliminate alimony and child support obligations, as well as criminal penalties.
Except in very limited circumstances, bankruptcy cannot kill student loans.
Bankruptcy cannot prevent a “secured party” from repossessing the property. According to Nolo.com: “A bankruptcy discharge eliminates debts, but does not eliminate ties. So, if you have a secured debt (a debt in which the creditor has a lien on your property and can debt), bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property. “
4. If your unsecured debt is $ 10,000 or more, debt arbitration could save you more time and money than bill consolidation. Here’s why: With debt settlement, your unsecured debt is reduced by up to 50% and you won’t have to pay additional interest on the remaining balance. This is not the case with invoice consolidation, where there is only a reduction in interest rates. As a result, a debt settlement program may have a shorter repayment term than an invoice consolidation one.
5. There is no public record that you have ever paid off your debts.
6. With debt arbitration, reduced balances appear as “paid in full” or “paid as settled” on your credit report.
7. Debt settlement negatively affects your credit score.
8. Never let a debt settlement company pressure you to join your program.
9. Don’t hire a company that isn’t interested in your specific financial needs.
10. Before enrolling in a debt settlement program, review your budget carefully and make sure you can afford the monthly payments. Don’t be surprised if you have to eliminate certain nonessential expenses.
11. During the debt settlement process, calls and letters from creditors may continue. Enrolling in a debt settlement program does not automatically stop “legal collection activities.”
12. Debt arbitration can be a gamble because some creditors may refuse to negotiate. In such cases, you are responsible for paying the outstanding balance on the creditor’s terms.
13. As we mentioned earlier, only unsecured debt, such as credit cards and personal loans, can be negotiated at reduced amounts. You cannot pay off mortgages, rent, utilities, cell phone and cable bills, insurance premiums, auto and student loans, alimony, child support, taxes, or criminal penalties.
14. You could suffer tax consequences. For example, if you owe $ 25,000 and accept $ 15,000, the difference of $ 10,000 is considered taxable income. The creditor must send you a 1099-MISC reporting a “discharge of debt income.”
15. A debt settlement company cannot represent you in court unless it is also a law firm.
16. Debt arbitration cannot prevent your home from foreclosure or car repossession.
17. Despite warnings from the Federal Trade Commission (FTC), some debt settlement companies continue to engage in unfair business practices. The Federal Trade Commission advises: “Before you enroll in a debt settlement program, do your homework. You are making an important decision that involves spending a large amount of your money that could go toward paying your debt. Enter the name of the company “.
Here are some factors to consider when choosing a debt settlement company:
1. How long has the company been in business? How much consumer and business debt does the business handle each year? How many people, families and companies does the company advise each year?
2. Are you assigned to an experienced financial advisor to ensure that your debt settlement program runs smoothly from start to finish?
3. Is the debt arbitration firm a member of the Online Business Bureau and your local BBB? What are your qualifications with both offices? What kinds of complaints have been made about your services?
4. Is the company an active member of TASC, (Association of Settlement Companies)? TASC requires all of its members to maintain a strict set of standards when doing business with consumers and businesses.
5. Is the debt arbitration firm a member of Dun & Bradstreet, the world’s source for business information?
This article has taught you the principles of debt settlement, one of the most popular forms of debt relief. Although a debt arbitration program can help you reduce your debt, it does not teach you how to live fiscally. The only way to achieve lasting financial freedom is to apply the dynamic laws of financial recovery to your daily life. These smart money principles will help you establish spending and saving habits that are built on a solid foundation. They are covered in a separate article titled “The Dynamic Laws of Successful Financial Renewal.”