Understanding the Risks Associated with Debt Settlement

If you are in over your head in credit card debt, the chances are you are feeling overwhelmed. Now imagine receiving a letter or phone call, promising to reduce that debt, maybe even erase it for pennies on the dollar. We have all seen the commercials: “We have a secret the creditors don’t want you to know” Sounds too good to be true, right? Well, in most cases it is.

Debt settlement programs, also commonly referred to as Credit Counseling Programs or Credit Consolidated Debt programs are offered by ‘for-profit’ companies that negotiate with your creditors to allow you to pay a settlement to resolve your debt. Many times, these companies instruct consumers to stop making payments to their creditors and instead make payments directly to them- in the hopes that enough money will be saved up to pay off the settlement amount that is negotiated. It is certainly a risk.

I have a confession. I started working for a debt settlement company in 2007 when I first became an attorney. I served as outside counsel for their clients when their debt settlement clients were sued. The Florida-based debt settlement company was under pressure by the Florida Attorney General to hire me and other attorneys because their clients were being sued as a result of entering their program. That is why most of these companies originate from or have their headquarters in California where laws are less lenient on them. Most all of them use Global Credit Solutions and Rocky Mountain Bank and Trust to collect your money. Think about what these companies do. It is almost like a layaway at K-Mart. You pay the debt settlement company money every month and they take a cut of your hard-earned payment for their fees and then when months or years pass, they MAY have enough to settle a debt. Then you are surprised when you get a tax bill for the remaining amount you did not pay back. Here is their business model: THEY EXPECT YOU TO CANCEL WITHIN THE FIRST YEAR. Because after all, most of these operations collect THEIR money first. You are smarter than that.

A debt settlement company will begin by requesting the names of your creditors and the amounts owed to each. After calculating your total debt owed, the company will give some type of estimate for reducing your debt under their plan, which will come with a monthly payment made to the debt settlement company. Many times, the company will advise you to stop paying your creditors and send your payments instead to the debt settlement company, who will handle the debt negotiation on your behalf.

The money you pay to the debt settlement company is deposited into an escrow-like account, held by the debt settlement company. Once the account balance reaches a certain threshold, the settlement company will then begin working out a settlement with your creditors, which will be for an amount lower than what you owe on each account. If your creditors agree to work with the settlement company, the company will pay the creditors from your savings balance and will also take their own fee for the work done on negotiating the settlement. This fee could either be a flat fee or based on a percentage of the cancelled debt.

While the concept of debt settlement can be appealing, several aspects of the process can make it dangerous for the debtor. The first major issue with debt settlement companies is the fact that you stop paying your creditors so that you can pay the debt settlement company and accrue a balance in your “savings” / “escrow-account” with them. What this does is put all these accounts into a past due status, which means your creditors can report you to credit bureaus and can also pursue collections. Your credit score can end up taking quite a hit and depending on how far a collection matter will go, you could also end up being sued by a creditor and have a judgment entered against you and your wages garnished.

Even if the debt settlement agency says they will negotiate with your creditors, your creditors are not obligated to work with these companies. If they do negotiate with the settlement company, they are doing this out of their own good will. They have no obligation to settle on the debt. If a debt settlement company says that they can guarantee that they will settle 100 percent of all their debts, this statement should be a major red flag that the company may not be completely legitimate. No company can guarantee that they will produce any type of results, especially when it comes to the settlement of a debt.

Debt settlement is not a quick process by any means. If you are wanting a quick resolution to your debt, this option may not be the best one for you. Even after the debt is settled, it can take years to rebuild your credit to where it needs to be. In fact, sometimes, the best option may be filing for bankruptcy or credit counseling. An experienced bankruptcy attorney can help best evaluate your situation to figure out which choice would be best for you.

Additionally, settling your debt can have some adverse effects when it comes to taxes. The Internal Revenue Service (IRS) considers forgiven debt as income, and you will be expected to pay income taxes on that amount.

One of the major complaints regarding working with debt settlement companies involves the fees that come along with the service. Many times, the company will take a 20 to 25 percent fee from you when all is said and done, whether it be a final lump sum payment or an installment plan. However, the FTC does prohibit debt settlement companies from charging an upfront fee before working, due to cases of prior abuse reported to the FTC. Therefore, if the company demands an upfront payment, it is likely a scam and should immediately be reported.

If you have questions on this topic or are struggling with debt, call our law firm to schedule a free consultation. Having debt makes you stay up at night. It stresses you out. It ruins relationships. I went through it. Boldly, I mustered up the courage to call a bankruptcy attorney and I pressed the restart button in 2008. And even though ten years has passed since I made that decision to restart my life, I never forgot what it did for me and how it helped me start over.

It even inspired me and my law firm to become the largest filers of bankruptcies in the country and in the top two in Florida- all from our offices in Orlando and Kissimmee. The Benenati Law Firm has eliminated nearly a billion dollars of debt for its bankruptcy clients, making the firm one of the top twenty filers of bankruptcy in the nation. Remember, we are local in your hometown. We make our hours convenient for our clients and offer free consultations on Saturdays (9:00 a.m. – 3:00 p.m.) along with our normal business hours throughout the week. Go to https://www.407bankrupt.com/ or call 407-777-7777 to set up a free private consultation and learn more information. Because Life Has a Restart Button.

We remain OPEN, fully operational, and able to serve you remotely from the comfort of your home.

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