There are plenty of perils for consumers dealing with this largely unregulated industry, still debt settlement is popular with some troubled borrowers who are trying to avoid bankruptcy. Also, it is important to recognize that debt settlement is not the same as debt consolidation or credit counseling. With debt consolidation borrowers are offered one large loan to pay off their smaller debts; whereas credit counseling agencies try to set up low-interest repayment plans, so borrowers can pay off their debt over time.
Debt settlement is different. Instead of offering a repayment plan or loan, these companies usually advise their client to stop paying their bills and save their cash instead, which the settlement company will then use toward payment of the negotiated lump-sum settlements.
There are some dangers with form of debt relief that include fraud, credit score damage, lawsuits, wage garnishment and taxes. Some settlement companies are flat out fly-by-night scams that are simply too inept or inexperienced to negotiate deals with your creditors effectively. Either way, you lose lots of money with no results. The FTC has excellent guidelines you should follow when choosing a settlement company. You should also read the new FTC rules regarding this form of debt relief. Remember that while many praise the FTC's new rules, many feel they do not go far enough. And, few states regulate the industry, so it's completely "buyer beware".
Creditors are increasingly using collection firms that are quick to file lawsuits when borrowers default. This can lead to wage garnishment or liens on property. According to Jamie Welsh, a director with Kaulkin Ginsberg, which tracks the collections industry, some creditors are so resistant to working with these companies that they immediately file a lawsuit against a debtor as soon as they are contacted by the debt settlement company.
Be aware, when you settle debt, the difference between what you owe and what you pay is typically considered taxable income by the IRS. This means, if you are in the 25% federal tax bracket, you could owe $2,500 for every $10,000 in debt that's forgiven. Plus, this form of debt relief isn't cheap. Most companies charge between 14%-18%of the total face value of the debt you want settled, while others require a large percentage of the amount they actually settled for you. Also, if you choose method of debt relief, it will hurt your credit score, but you can repair it by using a secured credit card or a gas/store card. In addition, you will need to make timely payment on other bills while using debt settlement services. Finally, debt settlement is not fast. The average time for the process takes closer to two years.
However, you can always try to negotiate yourself, and there are free resources, such as debt settlement softwareand sample debt settlement letters,on the web.
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