In debt settlement, a creditor agrees to accept less than the amount you owe as full payment for an overdue debt. Although you have the right to settle your debts, from mortgages to home equity loans to credit card bills, there is a cost, to your wallet and to your credit history. Debt settlement isn't cheap, and the industry includes some unscrupulous companies. However, learning your rights and doing basic research before you sign a negotiator's contract can protect you. You also can try to negotiate a debt settlement yourself by contacting the creditor directly.
Debt Settlement and Your Rights
Delinquent accounts sometimes can be settled for a fraction of what is owed. Before any settlement is reached, you should expect your creditors to contact you regularly for overdue payment. You have the right to ask them not to contact you at work, and they must comply. However, you still owe the debt.
You have the right to hire a negotiator to handle the settlement for you. You need to sign a limited power of attorney that gives the negotiator the right to speak with your creditors on your behalf. Usually, you must be at least three months delinquent before a creditor will consider settling your account. A creditor will not agree to a debt settlement if you are current on your payments.
Using Good Judgment
These companies make money off costumers that may be desperate, so you must be careful. Only do business with a company that is accredited by the Better Business Bureau. One way to find a reputable debt settlement company is by contacting the National Foundation for Credit Counseling (NFCC), which is a nonprofit organization and the nation's oldest consumer debt relief agency. The NFCC provides free budget counseling and partners with local agencies to administer debt relief.
Consider also that some debts are easier to negotiate than others. Credit card debts are the easiest. Loans that are secured by assets are the most difficult and often require the sale of the asset. A short sale is an example of a negotiated secured-asset settlement.
Full Disclosure
If you exercise your right to hire a settlement company, the company must fully disclose its fees to you up front. It must not collect a settlement fee prior to securing the settlement. It should not guarantee that it can stop collection calls or that it can make the debts "go away." It should not tell you it can help you get a government grant to eliminate your debt, because there are no such grants.
Settling your debts most likely will have tax consequences. Although you may save thousands in repayment costs, the forgiven debt (the amount you saved through debt settlement) is considered income for tax purposes. However, if you owe more than you own in assets, you may qualify for insolvency, in which case you may want to consult with an accountant.
Settlement Consequences
In addition to owing taxes on the settlement, you may owe the negotiator a hefty fee. Negotiators usually charge a percentage of the total amount owed or a percentage of the amount saved. That may total thousands of dollars. The most attractive settlements are reserved for those who can pay the entire amount at once, although a payment plan may be arranged.
Your credit score will suffer the most damage, especially if you had excellent credit previously. You have the right to order one free credit report per year through AnnualCreditReport.com. Your credit score is based on the information reported on your credit report. After your settlements are complete, begin rebuilding your credit. It may take time, but you can have a good credit rating after a settlement.
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