Debt settlement companies are all over, promising to help you get out of debt at a lower cost. Along with their omnipresence are numerous complaints about their operations. These complaints include taking advantage of vulnerable debtors by not revealing the whole truth behind their services.
The promise of getting out of debt, can have many convinced even those that are not prone to being gullible. Below are seven things that debt settlement companies will try to hide from you according to Scura Attorneys at Law.
Here’s what to look out for.
There is a Higher Probability of Getting Sued
If you decide to hit the debt settlement highway, there is a high probability of the credit company suing you.
Let’s assume that someone owes you money. Instead of paying the debt, they send you a “no contact letter.” If the debt is big enough to justify the legal process and costs, will you not sue?
If there is a money judgment, the credit company can garnish your wages, collect deposits from your bank, or place a lien against your personal properties like your vehicle and real estate properties.
With such a ruling, the only way to get out of the debt is:
- Being financially unstable, so you are considered judgment proof.
- Paying the judgment amount in full
- Declaring bankruptcy
You Might Pay Taxes on the Amount Settled
In case you settle for a lessor amount than the one you owe the credit company, the IRS will treat this as an income. Why? You borrowed money, spent it, but you are not repaying it. That is equivalent to an income.
The credit company will probably send you the 1099-C form if your forgiven debt is more than $600. Even if the amount is lower than this, the IRS will require you to report it on the “Other Income” bit of the tax sheet.
It Will Damage Your Credit Record
Your creditor might accept a settlement, but they will still send a report showing that your account settled for less than you owe. Unless your account already had some late payments, such a report is bad since it will remain in your account for seven years. It can also lead to a drop in your scores by at least 10%.
You Will Not Pay 50% Only
Contrary to what debt settlement companies say, you will not only pay 50% of the debt owed. If you add any due taxes and their negotiation fee for the debt settlement company, you will end up paying at least 70-95 percent of the amount owed.
There is a Chance of Your Debt Ballooning
The first step in debt settlement is sending a letter of no contact to the creditor. While the creditor will oblige to this due to the Fair Debt Collection Practice Act, it does not stop them from adding penalties, interest, or legal proceeding costs to your account in case they sue.
The Debt Settlement Company Should Not Charge You Until There is a Settlement
According to a 2010 TSR federal rule, debt settlement companies should not charge clients they acquire until there is a settlement arrangement in place.
If you are planning to settle and the settlement company is charging you before you can agree with the creditor, then maybe the debt settlement company is violating this rule. It is also advisable that you avoid working with such a company as they might be conning you.
You Can Settle on Your Own
Believe it or not, you can negotiate with your creditor can probably achieve the same or even better results than you would with a debt settlement company. It also means saving on the 15 – 25% negotiation fees that debt settlement companies charge.
Getting out of debt is not a walk in the park, which makes people result in debt settlement. However, debt settlement companies will convenience you to go ahead with the procedure without letting you in on everything you should know. They will not tell you that you can settle on your own or even get sued. Before deciding to work with a debt settlement company, you must do as much research as possible and talk to a professional.