Debt Settlement: How To Decide If It's Right For You

Largely unregulated and filled with perils for consumers, the debt-settlement business has nonetheless discovered a niche among troubled borrowers who are trying to prevent bankruptcy.

Debt settlement is occasionally confused with credit card debt consolidation, in which borrowers are offered one big loan to pay off their smaller debts, and with credit counseling, in which agencies attempt to set up low-interest repayment plans so borrowers can pay off credit card debts over time.

But debt settlement can be a different animal. Rather than offering a loan or repayment plan, debt settlement firms typically advise their clients to stop paying their bills and instead save up cash, which the company will then use to negotiate lump-sum settlements.

The dangers are numerous, including:

Fraud. Some organizations providing debt settlement are fly-by-night scams, eager to take big upfront fees and then disappear. Others are too inept or inexperienced to negotiate effective deals. Either way, the result may be the same: funds down the drain at a time when you can ill afford the loss.

Damage to your credit score. Failing to pay your bills on time will trash your credit scores. The better your scores, the greater the toll. Settling a credit card debt for much less than what you owe can do extra harm.

Lawsuits and wage garnishment. Creditors increasingly are utilizing credit card debt collection law firms which are fast to file lawsuits when borrowers default. A successful lawsuit can lead to wage garnishment or liens on your property. In reality, some creditors are so resistant to working with debt settlement firms that they right away "go legal," or file a lawsuit against a debtor as soon as they're contacted by his or her debt-settlement firm.

Lack of regulation. The federal government doesn't regulate debt-settlement firms, although the Federal Trade Commission is thinking about imposing some rules. Few states regulate the sector, and where by individuals states are, the debt-settlement firms aren't. So -- for now at the least -- it's completely "buyer beware."

Taxes. The distinction between what you owe and what you spend in a judgment commonly is considered taxable earnings by the IRS. So if you're from the 25% federal tax bracket, you could owe $2,500 for each $10,000 in loan that's forgiven.

Cost. Debt settlement doesn't come inexpensive. Some firms charge 14% to 18% on the total face value from the financial debt you want settled, while others call for a large percentage from the amount they actually settle for you.

Time. Furthermore to not being affordable, debt settlement typically isn't fast. The average debt settlement course of action takes closer to two years.

Contrast that having a Chapter 7 bankruptcy, which wipes out most unsecured debts and is usually above within four months. Folks who file such bankruptcies get a fresh start that enables them to begin rebuilding their credit rating instantly. They no longer owe their creditors, as well as the upfront fee for filing is commonly around $1,200 to $1,500 -- far less than the expense of debt settlement.

Clearly, in case you can't pay out your bills and it is possible to file a Chapter 7, that's a much better course than debt settlement.

If you're contemplating debt settlement, initial talk to an experienced bankruptcy attorney about your situation. In the event you choose to hire a debt-settlement organization, be prepared to do plenty of research -- with little regulation and no guarantees, you'll wish to pick carefully.

Fortunately, the FTC presents some guidance. Legitimate corporations, it says, are those that:

- Do not guarantee any outcomes.
- Won't accept you if you can actually pay your loan.
- Have written policies and procedures about their debt-settlement plan.
- Are members of the Far better Business Bureau.
- Have a customer-dispute resolution and review procedure.
- Have in-house attorneys with significant encounter in credit rating industry compliance.
- Manage customers in-house, never referring them to a third party.
- Offer full disclosure of all plan service fees and expenses before the commence of a debt-settlement software.
- Inform customers that the IRS classifies any forgiven debts above $600 as income that will be taxed.
- Demand prospective clients to commit to saving cash on their own to fund settlements.
- Don't handle or escrow cash saved by clients since with the risk of embezzlement and fraud.
- Negotiate on an ongoing basis with creditors and present all agreement presents towards the buyer for his or her exclusive approval.

Also, you ought to stay away from any firm that makes unrealistic promises, just like saying that you won't be sued or that it can stop creditors from calling you. (Debt-settlement corporations can and do send "cease contact" letters, but they cannot prevent creditors from ignoring these requests.)

Any on the following ought to be trigger for concern:

- The corporation isn't a member of TASC. The Association of Agreement Firms, the largest trade association serving the debt-settlement business, has strict market standards to which its members voluntarily agree.

- Costs aren't determined by performance or outcomes. Prevent companies that collect cash up front or according to a percentage of your debt.

- Counselors are paid on commission. This serves to improve the chances counselors will lie to get you inside the door.

- No money-back guarantee. You ought to have at the least 30 days to change your mind and receive a refund of at least some of your respective charges if none of one's debts are settled.

- Inexperience. Numerous firms have sprung into existence recently and have small encounter successfully negotiating settlements. Do not let them practice on you.