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Debt Settlement Frequently Asked Questions


How does Debt Settlement Work?

In simple terms - debt settlement is when you and your creditor agree to settle your debts that are owed to them (the principal balance), at a reduced balance. For example: You have $15,000 in credit card debt and they agree to take a payment of $6,000 to settle your obligation to them in full. Upon payment of the $6,000, nothing else would be owed to them. This process is different from Credit Counseling, which usually only reduces the interest rates and not the principal balance.

Will this strategy work for me?

Debt Settlement is a very effective way to get rid of your debts, but it is also one of the most aggressive. Before we look at applying the Debt Settlement Strategy, it's important to understand the creditor's position.

There really isn't any creditor out there that will normally settle an obligation for less money, if there were no hardship or if all of your payments are current. It just doesn't make sense to them. They have rules and guidelines they must follow. No one in their right mind would allow someone that was continually making all their minimum payments (which we all know the banks love) or not suffering a legitimate hardship, to pay a discounted rate of 40 - 60% to settle the obligation in full. So in order to qualify for a debt settlement program the following must apply:

1. Do you have a legitimate financial hardship condition?

Most debt problems are caused by the loss of or reduction in income, divorce/separation or because of medical issues. These are legitimate financial hardships that can happen to anyone through no fault of their own, and any one of these situations can create a legitimate financial hardship on you or your family. You must have a legitimate financial hardship in order to qualify for a debt settlement program.

2. Are you committed to getting out of debt?

We know that in these tough economic times opportunistic individuals and companies will often take advantage of a person who is feeling desperate and overwhelmed by debt. It seems that they will say or do just about anything to make you think that their solutions are the best. That getting out of debt is easy. That by simply paying them a fee will make all of your problems go away. The truth is there is no "magic button" out there you can push to end your debt cycle. It's hard work and will require a commitment on your part. You must determine a savings plan and stick with it. It most likely took you several years to get into debt and it's going to take some time to get out of it. You must commit to saving up as much money as possible, as quickly as possible, in order to settle your debts with your creditors.

Remember, if a creditor is going to accept a settlement offer, you are usually going to have to have that money available as a lump sum and they are not going to wait forever. The creditor maybe interested in settling the account to clear off the bad debt but if they are going to reduce the principal balance, they will expect immediate payment in return. There is usually no incentive for them to take long-term payments and forgive 40-60% of the balance owed so, you must be committed to getting out of debt as quickly as possible.

As with most things in life, success is determined by your level of commitment. Debt settlement will not work if you aren't committed to getting out of debt once and for all.

3. Do you owe more than $10,000 in unsecured debt?

Remember, debt settlement is a very aggressive way to get out of debt. It's faster than Credit Counseling and not as severe as filing for bankruptcy protection. While everyone's budget is different, most people can work their way out of smaller debt obligations. If you only owe $6,000, for example, unless you are really in dire straits you can probably deal with that obligation on your own by paying off the debt in full, over a period of time. We believe that smaller debt loads are more of a budgeting problem than a serious financial hardship and it's usually best to work something out directly with your creditor(s).

What happens to my credit?

The effect of a debt settlement program on your credit profile will partly depend on your current credit status. Most people that are already struggling or that are already behind on their payments usually have less than perfect credit already.

Since you are not making your required payments, your credit profile will be adversely affected. Don't let anyone tell you otherwise. While you are not making payments and until the debts are settled, your creditors may continue to report late payments, charge-offs and collections on your credit reports. Once your debts have been settled, your credit reports may indicate that the account has been "closed/satisfied", "settled" or "settled/closed" or "settled for less than what was owed". No one can prevent a creditor from reporting true and accurate statements on your credit reports.

What are the tax consequences?

Creditors are also generally required to provide a Form 1099-C in the event that they forgive a debt to a consumer that is greater than $600.00. Please understand that if you receive a Form 1099-C showing income in the form of canceled debt, this does not necessarily mean that you owe taxes on the forgiven portion of the debt. In most cases, clients can legally and ethically exclude forgiven debt from their income through the "insolvency exclusion" provided by the IRS code. This exclusion means that your liabilities exceed the fair market value of your assets, or in other words, you "owe" more than you "own". We recommend that you consult your tax advisor regarding your particular circumstance. They will also be able to assist you on filling out Form 982 that excludes you from the particular debt.

What about lawsuits?

While creditors have the legal right to sue you if you are not making your required payments to them, such lawsuits are far less common than most people think. It costs money to sue someone, and a legal judgment is simply a piece of paper unless there is a way to collect money against it.

In general, lawsuits can normally be avoided, if you are willing to work out suitable arrangements with your creditors. At the end of the day, a creditor is more interested in getting the debt off their books as opposed to suing. Creditors won't admit it publicly, but they settle billions of dollars each month with struggling consumers across the country. Settling the debts with a consumer is much better for them than forcing people into bankruptcy through overly-aggressive collection tactics.

Can my wages be garnished?

Actual garnishment actions are relatively rare, and do not happen without advance warning. From the time you stop making your payments, the creditor will attempt to collect the debt on their own (usually for the first 6 months), then send it to an outside collection agency (usually for 3 - 12 months) or they will sell it to a debt buyer (and the process starts all over again). If a creditor did want to garnish your wages, they must first file a lawsuit against you, obtain a judgment, and then take an additional step to obtain authorization for the garnishment. Plus only one creditor can garnish your wages at a time. No one can take your paycheck without court approval, and you must be given notice of such court action through formal documentation. So don't let any creditor or collections company tell you that they are going to garnish your wages if they have not sued you and obtained a judgement against you.

Can creditors still call me?

You must understand that if you are not making your required payment(s) to your creditors, they can and will call you and send notices in the mail. Only when your debt goes to a third party for collection (usually after 180 - 210 days) does the FDCPA (Fair Debt Collection Practices Act) go into effect, which can afford you relief from phone calls and other harassing tactics used by those agencies.

A good debt settlement counselor will explain what you should be communicating to your creditors every step of the way until it is time to settle the debts or until the debts have matured to a level that makes sense to start the negotiations process.

What's the difference between Credit Counseling and Debt Settlement?

Here is the primary difference between the two: with credit counseling, you pay back the entire debt at a reduced interest rate. With debt settlement, you pay back a percentage of the principal balance. So with debt settlement, you can become debt free much more quickly - usually in 2-3 years. Credit counseling can take you from 5 - 9 years.

Credit counseling usually works best if the debt(s) have not been charged off or have not yet gone to collections and you must have the ability to make monthly payments. Debt Settlement works best if you are suffering a financial hardship and can no longer make the required payments (even at a reduced interest rate).

If you miss a payment while participating in a credit counseling program, the creditor can elect not to participate any longer and can go back and retroactively charge you past interest and fees.

What types of debts can be included in a debt settlement program?

Professional Debt Settlement works best for these types of unsecured debts: IT IS IMPORTANT TO INCLUDE ALL OF YOUR ELIGIBLE ACCOUNTS INTO THE PROGRAM; creditors are less amiable to settle on their account when they know that you have other similar accounts that are current and active.

  • Credit Cards
  • Unsecured, non-collateralized personal loans
  • Credit Union unsecured loans and credit cards
  • Apartment Leases - provided that you no longer live there
  • Mortgage "short pay" balances - if you lost your home and you still owed money on the loan
  • Retail Store Cards
  • Gas Cards
  • Auto Repossessions - the balance left over after they took the vehicle away
  • Student Loans that are not insured by the government
  • Past Cell Phone and Utility Bills (as long as you are no longer using their services)
  • Medical bills that are in collections
  • Some types of Payday Loans
What types of debts can not be included in a debt settlement program?

Professional Debt Settlement Help does not usually work for these types of debts: The debts listed below are usually not accepted by a professional debt settlement company. These types of debts are either secured, quasi-secured or by failing to make the payments could have unforeseen consequences and as such, can be very difficult to negotiate.

  • Current Mortgage, 2nd mortgage or home equity line of credit
  • Sallie Mae accounts of any type
  • Standard PayPal accounts
  • Federal/Government Backed Student Loans
  • Current or Pending Wage Garnishments/Judgments/Litigation
  • Court-ordered child support or alimony
  • Criminal fines or penalties
  • Military Star cards
  • Current provider utility bills
  • Back Taxes
  • Casino debt
  • Motorcycle credit cards
  • Bank overdraft fees
  • Secured lines of credit
  • Rent-to-own accounts
  • Timeshares
  • Car repair bills
  • Attorney fees
Can I settle my debts on my own?

Although you can achieve settlements with your creditors directly, here are some reasons why it makes sense to hire a debt settlement company to negotiate for you:

  • You get the benefit from collective settlement and their established relationships with your creditors. Creditors are much happier to entertain bulk settlements as opposed to individual ones. This allows the creditors to clear off larger books of bad debt all at once. This saves them time and the additional money that it costs them by using alternative forms of collection.
  • An experienced company will know if there are any special settlement trends that a creditor may be offering simply by their day-to-day interaction.
  • Creditors hire professionals to collect on bad debts with one main goal in mind, collect as much money as possible. They employ high-pressure tactics that help them to achieve the maximum amounts possible. Using a professional that goes to work for you, affords you a more level playing field so that you can achieve the same results, but in your favor.
  • The debt settlement company will handle all the negotiations and paperwork (settlement acceptance letters/agreements/offers) for you.
Don't I have to pay taxes on the money I save?

Creditors are required to provide a Form 1099-C in the event that they forgive a debt to a consumer that is greater than $600.00. Please understand that if you receive a Form 1099-C showing income in the form of canceled debt, this does not necessarily mean that you owe taxes on the forgiven portion of the debt. In most cases, clients can legally and ethically exclude forgiven debt from their income through the "insolvency exclusion" provided by the IRS code. This exclusion means that your liabilities exceed the fair market value of your assets, or in other words, you "owe" more than you "own". We recommend that you consult your tax advisor regarding your particular circumstance. They will also be able to assist you on filling out Form 982 that excludes you from the particular debt.

To learn more about your options when faced with debt, give us a call or click here.

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