To put it very simply, debt settlement companies get your creditors to agree to forgive some of your debt. However, their services can be expensive and there may be significant unforeseen consequences. Until recently, debt settlement companies were not regulated by the Federal Trade Commission. Some of their practices may be fraudulent and illegal.
Look out for substantial fees, possible lawsuits & damage to your credit score
Debt settlement companies typically charge a large up-front fee and monthly fees for their services. If you can't pay the up-front fee in full, they will set-up an installment plan. They might tell you to stop making debt payments and stop communicating with your creditors. However, negotiations with your creditors may not begin until the up-front fee is paid in full. In the meantime, your creditors may sue you to collect the debt. If they win, they have the right to garnish your wages or put a lien on your home. These actions negatively impact your credit score.
Be careful - forgiven debts are taxable income
The difference between the amount you originally borrowed and the settlement amount is added to your income for taxation by the Internal Revenue Service. You should consider this tax liability when you are weighing the costs and benefits of a debt settlement contract.
Do it yourself
Debt forgiveness is not a new concept. There's no need to hire a company to handle the transaction. With a little negotiation skill, you can settle your debts by yourself. Simply contact your creditor and make a proposal.
Some debt settlement companies provide legitimate services
|Debt Settlement VS. RethinkingDebt|
|No Government regulation - some are being shut down||Licensed by the NYS Dept. of Financial Services, EOUST and HUD|
|Debtor pays < 100% of their debt||Debtor Pays 100% of amount owed|
|Large fee paid up front||Small fee paid monthly|
|Recommend clients withhold payments from creditors||Monthly payments to creditors start immediately|
|Client's credit score adversely affected||No direct effect on credit score - timely payments improve score over time|
|Income tax obligation for amount forgiven in settlement||No income tax obligation|
|Little client support||Strong client support|
|No Guarantees of success||45 years of successful debt management counseling|
|They are For Profit companies||Not for profit agency using earnings to support programs and financial education|
Schedule a Consumer Credit Counseling Appointment
RethinkingDebt is here to help you understand the costs and benefits of a debt settlement contract. A consumer credit counseling session can provide you with information about all of your options for paying off debt. We offer debt consolidation and debt management programs that will improve your credit score, and our fees are some of the lowest in the industry.