Top Reasons Why Your Lawyer May or May Not Advise You to Undertake Debt Settlement
After years of uncertainty, the American economy is growing rapidly again. As may be expected, much of the growth is being fueled by the ever-increasing debt being piled up by consumers. The Consumer Financial Protection Bureau reports that not only has there been an increase of 50% in credit card applications since 2010 but also credit card balances (https://americanfaircreditcouncil.org/wp-content/uploads/Regan-Report-Short-Version-FINAL-AFCC-Brand.pdf) have grown by 9%. Even as the economy surges ahead, many consumers continue to struggle to generate adequate cash flows to stay current on their debt, and unfortunately, many fail due to reasons like unexpected illness, loss of employment, divorce or even natural disasters. Faced with debt that seems to be insurmountable, consumers have one last option of debt management before being forced to file for bankruptcy.
Understanding Debt Settlement
Despite high-decibel advertising by debt management companies promising to reduce outstanding debt by more than 50%, not many people understand what debt settlement entails and how debt reduction is even possible. The premise is very simple even if the promises are not very credible. You have a lot of debt clocked up on your credit cards or owe other lenders money that you are unable to pay the monthly dues on. Since you see no chance of being able to do so in the near future, it may be possible to approach the card companies and your lenders with a request for them to reduce the amount of debt outstanding. If this is done you can either pay the debts off with whatever savings you have or undertake a structured repayment plan that can extinguish the debt in a reasonable time frame.
You can do the negotiation by yourself to convince your creditors that this is the only feasible option otherwise; you will have to file for bankruptcy. However, since the process is complex and tough, you can also engage a professional debt settlement company to conduct the negotiations on your behalf. The reason why lenders will even consider reducing the debt is that credit card outstanding and personal loans are typically unsecured debts, which cannot be recovered if the borrower defaults and files for bankruptcy. If the lender is convinced that the borrower is really in dire straits, he may opt to accept a reduced payment because otherwise, the recovery could be zero in case the borrower files for bankruptcy. Click here to know more about debt relief.
The Process of Debt Settlement
Typically, when you approach a debt settlement company, you will be required to give the details of the debts you owe. The debt management company will estimate the amount by which it can reduce your debt and work out your new monthly payment. They will advise you to stop your monthly payment to the card companies and build up a corpus instead that can be used to pay off the lenders after the negotiations are concluded. For their services, the debt settlement company charges a fee; while this may be a fixed amount, typically, it is a percent of the savings that they have been able to achieve for the customer.
Why Debt Settlement Can Be a Viable Way to Get on Top of Debt
A viable way of avoiding bankruptcy: The biggest advantage of debt settlement is that you can avoid filing for bankruptcy, which can have extremely serious repercussions that last a lifetime. The entry of bankruptcy on your credit report stays for as long as 10 years but there are many lenders as well as employers who ask for a declaration that you have never been bankrupt and a false declaration will amount to a fraud with grave consequences. On the other hand, debt settlement stays on your credit report for only seven years, following which all information is expunged so there are no lasting consequences.
Relief from debt-trap: While debt settlement can sometimes drastically reduce your outstanding debt, it should not be a tactic for racking up a huge amount of debt with the expectation that it can be slashed. Debt settlement is a viable strategy for those who have their backs to the wall and considering filing for bankruptcy. By being able to settle debts effectively, you can get out of debt in a reasonable time and resume your normal life. Debt settlement can make you debt-free in two to four years that is less than even debt consolidation.
Adverse Outcomes of Debt Settlement
Negative impact on credit score: When you stop making payments to the card issuers to exert more pressure on them and make them more amenable to settling the debt, the defaults get reported to the credit bureaus and your credit score takes repeated hits. Even if the settlement is executed successfully, the credit report continues to carry the information about the delinquency for as long as seven years. Evidence of debt settlement together with a poor credit score can be a hindrance to getting new loans, credit cards, insurance rates or even jobs.
Tax liability: Even though it is rarely spoken about, the Internal Revenue Service treats the debt that has been settled as income in the hands of the debtor and therefore, income tax liability arises. When you are genuinely experiencing a cash crunch, paying the tax can be quite difficult. The forgiven debt has to be reported to the tax authorities even if the creditors fail to send you the Form-1099C that they are obliged to send you.
Debt settlement is something that you can explore if you have run out of options save bankruptcy, however, if you have missed on making a few of the monthly payments but are willing to get back on track, you can ask the creditors if they can offer you a hardship program. These programs are specifically meant to help customers who are experiencing cash flow problems by reducing the monthly dues or the rate of interest for a specified period. You can also consider credit counseling that you can undertake with a non-profit that will help you help you to get your finances back on track by showing you how to budget and organize debt management plans. You can negotiate with the card companies to allow you a reduced monthly payment so that you can pay it in full and not have your credit score negatively impacted.