Debt settlements are used to pay off a credit card debt or any type of debt by paying less than the total debt. This is usually done through the art of negotiation, sometimes by using companies that deal in debt settlements. But you have to be careful using a debt settlement company. It has potential to do more harm than good to your financial future.
Transparency of Debt Settlement Companies
Debt settlement companies are sometimes a scam, says Bankrate.com. They frequently find business by contacting people on the phone and may not always reveal what they do with the money you send them. In many cases, a debt settlement company will ask you for an upfront fee that might continue for indefinite amount of months. This money will accrue and then be used to pay off your debt after the organization negotiates with your creditors. Be careful, though, and avoid them if the fees are overly large and if the company doesn't properly explain what they'll do with your money.
Hurting Your Credit Score
A common tactic used by debt settlement companies is their request for you to stop all communication with your creditor. Simpledebtfreefinance.com says that this will cause interest to increase and also bring on more late fees that could make your debt even worse in the interim. Once this happens, your creditors will report your delinquent payments to the credit bureaus. This, in turn, will considerably lower your credit score.
Taxes and Creditors Suing
Despite drawbacks, many debt settlement companies can successfully negotiate a lower settlement offer for you. Legalcreditcardsettlement.com says that 40 to 60 percent of your debt could be reduced using these companies. But they also remind that you'll still have to pay income taxes on the amount written off, despite the taxes being less than if you kept the debt. Simply fill out a 1099-C form (or Cancellation of Debt) to report the settlement (see Resources). Keep in mind, however, that because you only paid part of the debt, creditors could still go after you if not even sue you to pay off the rest of the debt. Contact your creditors and ask for a document in writing proving your settlement.
Negotiating Yourself
In order to avoid the pitfalls of debt settlement companies, it's sometimes best to just negotiate with your creditors yourself. Bankrate also points out that debt settlement companies can charge you several thousands dollars in fees. By contacting your creditors on your own, many of them are willing to negotiate with you to work out a time payment system---or, occasionally, complete debt settlement. If this isn't doable, then consult with a bankruptcy attorney about the possibly of filing for bankruptcy. Assuming you do make a settlement, be sure to contact all three credit bureaus and list your debt as "Paid" so your credit score won't continue to suffer.
0 comments:
Post a Comment