If you are facing overwhelming debt, you may be considering debt settlement. While this can be a viable alternative, it is important that you know exactly what debt settlement entails and beware of the risks involved.
What it is and the potential consequences
Debt settlement refers to negotiating with your creditors to repay less than what you owe. A surprising number of credit card companies and other lenders are willing to enter into these negotiations due to so many people defaulting entirely. This has led to a proliferation of debt negotiation operations, which offer to negotiate with your creditors on your behalf.
Some of these agencies make extravagant claims of being able to cut your debt in half or more. The reality is they may do so, but in exchange for large hidden fees taken out of your settlement. Others offer dangerous advice, such as stop paying your creditors during the negotiation process and send payments to the agency instead. Over time, while the agency accumulates the amount to pay off your debt, the creditor assumes you are defaulting and may charge off your account as unrecoverable, which will leave a long-term black mark on your credit report. Creditors may also be less inclined to negotiate a settlement after not receiving any payments from you for a significant amount of time, leaving you in a far worse position than you started.
Negotiating directly with creditors
If you decide to do it yourself, make sure you take action as soon as possible, and definitely before you stop making payments. If your creditors see that you have been trying to make timely payments in good faith, they may be more willing to hear your offer. Additionally, don’t stop communicating. Ignoring phone calls and throwing out notices without response signals an intention to default, whether or not that is your intent. Communicate honestly about your financial situation and your creditors may be willing to extend your repayment terms, let you skip payments for a month or two or take a percentage off the total amount you owe.
Even if you work out reasonable terms with your creditors, be aware that if your reduction involves more than $600, that amount becomes taxable income. A significant debt settlement could wind up costing you quite a bit in taxes, effectively shifting what you already owed the creditor to owing the IRS. Additionally, debt settlement appears on your credit report as a settled account, which is likely to have a negative effect on your credit rating and make future creditors wary of doing business with you.
A declaration of personal bankruptcy may seem like an admission of defeat greater than debt settlement, but the reality is that it can offer a fresh start and immediate relief from creditor actions that settlements cannot. Speak to one our experienced Pennsylvania bankruptcy attorneys to find out more about your bankruptcy options and receive qualified guidance on what course of action will work best for you.