Debt Settlement - article by Good English Article Sites

Debt Settlement Decoded

These are expressions you have heard too often from debt settlement companies, “we help you avoid bankruptcy”, “reduce debt by 50%”, “we negotiate with creditors”. While all of these promises may sound to be too good to be true, the truth is, they come at a price, if they ever do come true in the first place. Debt settlement agencies usually negotiate with the creditors in behalf of the client in order to reduce the amount of debt he or she is required to pay back. Once a settlement program has been initiated, the client is usually advised to cease all payments and contact with the creditors and that all monthly payments be sent to the settlement agency.

Such a move will of course come with serious repercussions from the creditors. For one, the creditors, regardless of the debt settlement will raise interest rates to penalty levels once you start missing out on payments. Following this, late and missed payments as well as over-the-limit fees will grow and expect letters and calls from collection agencies, attorneys and courts which will amount to further costs. If a judgment is obtained from the legal office, be ready to pay up. You may likely not face up to such a situation we have just described, but be assured that it can happen. Debt settlement agencies will usually tend to wait to begin negotiation until they have covered their fees and the full payments to cover the settlement and this can be bad for you.

A case scenario would involve a $1000 balance. Within six months, this could turn into $1600 if no payments are made as a result of a $24 monthly fee as well as late fees and over-the-limit fees at $38 each. Since debt settlement may take months, even a 50% settlement on the accrued $1600 would come to $800, giving no much savings in the end. Another drawback is what appears on the credit reports. Since the negotiated debt is reported as ‘settled’ rather than ‘paid in full’, this listing, which may last for seven years, will severely hamper your ability to obtain credit in the future. Banks are reluctant to lend where there is a history of less than full payments. Furthermore, since a settled debt that is greater than $600 is to be reported to the IRS, it is considered income and included in the year’s tax return and is taxable. This can create a tax liability of at least an additional $120. Nevertheless, for the debtors whose credit is already severely damaged, debt settlement is a viable option.

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