Debt Settlement Basics

Debt settlement is when a consumer negotiates the terms and repayment of their debt because they have lost their jobs or had major reduction in their household income where they can no longer afford the terms of the original payment plan.  Debt settlement can be risky because not only can it devastate one’s credit scores but sometimes it will deepen the debtors debt.  There are thousands of debt settlement companies who are reputable and do the very best for their clients but as with any industries, there are scammers also who prey on those who are in financial trouble.    Be aware of debt settlement companies who ask you large deposits up front and check on their references before you hire them.

Restructuring Your Debts

The basics of debt settlement is paying off the debt you owe a creditor for less than the face value of the debt, either at once or in multiple installments.  These debts are normally credit card debts and medical debts.  Other debts like turning in your auto because you can no longer can afford the payment and you owe a deficit also fall into the debt settlement category.  You do not have to hire a debt settlement company.  Anything a debt settlement company does, you can do it yourself.  A debt settlement company is a middle man between you and the creditor and debt settlement companies are not cheap.

Debt Settlement Process

The debt settlement process is when a consumer is overwhelmed with debt and can no longer meet paying his or her debt and is contemplating bankruptcy or debt settlement.  The consumer can hire a debt settlement company.  The debt settlement company will then act on the client’s behalf in representing him or her to the creditors and most likely tell the creditor that the debtor is on the verge of bankruptcy so the creditor is more likely to settle.  If you can convince to the creditor that you are likely a potential charge off, the creditor is very likely to settle with you.  Many debt settlement companies will most likely advise you to stop making payments.  A reputable debt settlement company may establish an escrow account for you where they will require you to pay them a portion of your paycheck and hold it on escrow so that when your and the creditor finally agree on a dollar amount, you will have enough of a lump sum to offer them as a settlement.   I strongly advise you against giving anyone a portion of your paycheck every month.  Tell the debt settlement company that you will be saving portions of your pay check and save the money yourself to get ready for a lump settlement.  There are no guarantees that your debt will be settled.  Statistics prove that over 75% of debts are never settled so the odds are against you.  Remember that you can settle your own debt instead of hiring a debt settlement company.

Be Cautious Of Debt Structuring Companies

Debt restructuring companies are not allowed and it is against the law to charge up front fees for services not performed.  The Federal Trade Commission has forbidden the charging of upfront fees to debt relief companies back in 2010.

Most debt restructuring companies will charge you a percentage of the debt they save you.  Normally they will charge you 20% of the debt they save you.  If they charge you more than 50% of the debt they save you, they are charging you too much.  Some debt assistance companies try to find a loophole in charging you upfront fees by calling the upfront fee as a processing fee, which is not illegal but is actually an upfront fee.  Debt settlement companies will probably charge you a monthly fee to be part of their debt restructuring program as well.

Forgiven Debts: You Can Get Taxed On Forgiven Debt

Another thing you need to consider is that forgiven debts and/or writeoffs can be classified as income and you may be liable to pay income tax on the debt forgiveness.  You need to consult your tax advisor or accountant.  With the combination of paying a debt settlement company and the potential of paying taxes on the forgiven debt, you may want to think twice on hiring a debt assistance service.  Whatever a debt restructuring company service can do, you can do it yourself.  There are many free  Do It Yourself  debt assistance informational materials available.

Many Mortgage Lenders Consider Debt Settlement Worse Than Bankruptcy

There are many mortgage lenders that really frown upon mortgage borrowers who had prior debt restructuring done.  They sometimes view settlement on debts worse than bankruptcy because with bankruptcy, they cannot refile bankruptcy for another 7 years whereas settlement of debts, they can easily file bankruptcy anytime.  Many disagree with folks with their mentality on their views of debt restructuring and settlement.  There are mortgage lenders who just regard debt settlement as a period of financial hardship.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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