If you are thinking about hiring a debt settlement company, there are important things that you need to consider. First, you will want to understand how debt settlement works.
What is debt settlement?
Debt settlement is a process where you and your creditors work together to settle a delinquent amount. You can do this on your own or through a debt settlement company. The idea is that you will pay off the debt in a lump sum for less than what is owed. When using a company, they will negotiate the amount for you. However, what most debt settlement companies fail to tell you is that their services can also leave you in greater debt than when you started.
Things to consider:
1. Your credit will be affected
Any delinquent accounts and charged off debts will stay on your credit report for seven years. You might be asked to stop making payments to make a lump sum payment later. Debt settlement companies often ask this before reaching an agreement with your creditors. While the idea is to save money for a lump sum payment, these missed payments will be considered delinquent. Remember, delinquent accounts show on your credit report, resulting in your score being lowered. You could also be sent to collections or be sued for the delinquent debt.
2. Interest and penalties will not stop during negotiations
Late fees and penalties will continue to accrue if you stop making payments. Remember, you run the risk of dealing with collection agencies or being sued.
3. No guarantee it will work
Your creditors may not come to an agreed settlement or they may not agree to negotiate at all. Some creditors have a policy not negotiate with debt settlement companies.
4. You pay more if the debt is settled
Since debt settlement companies cannot charge upfront fees, many charge a fee based on the percentage of each settled debt (calculated on the debt’s balance when you first enroll with their company). Some even charge a fee based on the eliminated debt. This is one reason why it is important to read the fine print before agreeing to work with a debt settlement company. Other fees can include monthly payments and set up fees.
5. You might be taxed on the forgiven debt anyway
If a debt settlement is successful, the portion of the forgiven debt can be considered taxable income by the IRS. Meaning, you may need to pay taxes on the forgiven debt. One way to avoid this is through bankruptcy. However, you will need to speak with a professional attorney to find out if this is a possibility for you.