Debt Settlement call 1-888-505-2369 and speak to an experienced lawyer for more information.
Debt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.
Essentially, debt settlement is the process of negotiating with creditors to reduce overall debts in exchange for a lump sum or agreed monthly payment. A successful settlement occurs when the creditor agrees to forgive a percentage of total account balance. Normally, only unsecured debts not secured by real assets can be settled. Unsecured debts include medical bills and credit card debts - not student loans, auto financing or mortgages. For the debtor, this makes obvious sense, they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering, sometimes by more than 50%, their debt balances. Whereas, for the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file bankruptcy (in which case, the creditor risks losing all monies owed).
Negotiating with a collection agency or junk debt buyer is somewhat similar to negotiating with a credit card company or other original creditor. However, many collection agencies (or junk debt buyers) will agree to take less of the owed amount than the original creditor, because the junk debt buyer has purchased the debt for a fraction of the original balance.
As a part of the settlement, the consumer can request that "collection" is removed from the credit report, which is generally not the case with the original creditor. Even if the removal of the collection account from the consumer credit report has been successfully achieved as a condition of settlement during negotiations, the negative marks from the original credit card company will still remain, according to Maxine Sweet, a spokeswoman for credit reporting agency Experian.
Settlement companies generally package their settlements into a larger bulk settlement with the creditor for less than the existing balances.
The debt settlement negotiators typically have built up a relationship during their normal business practices with the credit card companies and can come to a settlement agreement quicker and at a more favorable rate than a debtor acting on their own. With the current economic crisis, more and more credit card companies may be willing to settle existing credit card debts rather than add to their already large written off bad debt.
Creditor’s incentives
The creditor’s primary incentive is to recover funds that would otherwise be lost if the debtor filed for bankruptcy. The other key incentive is that the creditor can often recover more funds than through other collection methods. Collection agencies and collection attorneys charge commissions as high as 40% on recovered funds. Bad debt purchasers buy portfolios of delinquent debts from creditors who give up on internal collection efforts and these bad debt purchasers pay between 1 and 12 cents on the dollar, depending on the age of the debt, with the oldest debts the cheapest. Collection calls and lawsuits sometimes push debtors into bankruptcy, in which case the creditor often recovers no funds.
The problem is when consumers have too much debt and no savings to afford to pay a lump sum amount even if reduced to settle the debt. Chapter 7 bankruptcy wipes out most unsecured debt and is usually over within four months. People who file chapter 7 bankruptcy get a fresh start that allows them to begin rebuilding their credit immediately. They no longer owe their creditors, and the upfront cost for filing is usually around $900 to $1,500 -- far less than the cost of debt settlement. The offer by creditors to settle their debt is usually the last step before the creditor files a lawsuit in court against the consumer. Unless the consumer can afford to pay a lump sum amount to the creditor to settle the debt it is best to file bankruptcy and avoid legal proceedings including wage garnishment.
The dangers of using a debt settlement company are many, including:
Fraud. Some Washington DC debt settlement companies offering debt settlement are fly-by-night scams, eager to take big upfront fees and then disappear. Other debt settlement companies are too inept or inexperienced to negotiate effective deals. Either way, the result is the same: money down the drain at a time when you can ill afford the loss.
Credit score damage. Failing to pay your bills on time will trash your credit scores. The better your scores, the greater the toll. Settling a debt for less than what you owe may do additional damage.
Lawsuits and wage garnishment. Creditors increasingly are using debt collection law firms that are quick to file lawsuits when borrowers default. A successful lawsuit can lead to wage garnishment or liens on your property. In fact, some creditors are so resistant to working with debt settlement companies that they immediately "go legal," or file a lawsuit against a debtor as soon as they are contacted by a debt-settlement company.
Lack of regulation. The federal government doesn't regulate debt-settlement companies, and the Federal Trade Commission has implemented some rules and held hearings for Washington DC debt settlement laws.
Taxes. The difference between what you owe and what you pay in a debt settlement typically is considered taxable income by the IRS. So if you're in the 25% federal tax bracket, you could owe $2,500 for every $10,000 in debt that's forgiven. So be careful, you could be stuck with a five-figure tax bill.
Cost. Debt settlement is not cheap. Some companies charge 14% to 18% of the total face value of the debt you want settled, while other debt settlement companies require a large percentage of the amount they actually settle for you.
Time. In addition to not being cheap, debt settlement typically isn't fast. The average Washington DC debt settlement process takes closer to two years, according to many debt settlement professionals.
Bankruptcy is cheaper and faster. Clearly, if you can't pay your bills and you can file a Chapter 7, that's a better course than debt settlement call 1-888-505-2369 and speak to a lawyer for more information.
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