Debt settlement makes sense when you struggle to pay off your outstanding bills. It helps to pay off debts by reducing the total amount you actually owe. That’s why people opt for debt settlement to get out of unmanageable debt easily.
Are you carrying a high credit card balance? Or many f you might have a lot of debt! For a solution, you might be resting on those appealing advertisements from the popular credit card settlement companies. But contextually, is opting for debt settlement a good idea for your financial terms? If you are thinking of going with the debt settlement idea, you must be considering the benefits over other ones. If that seems familiar to you, explore the various aspects of choosing the best solution for getting rid of prolonged debts and improving your credit score now!
What does it mean to settle a debt?
Also, known as debt reduction, debt settlement can be the best option for you if you are looking for solutions to get rid of the long debts. Well, the settlements are profoundly negotiated with the debtor’s unsecured creditors. In short, if you have opted for debt settlement, that means you have willingly agreed to accept an amount less than the amount you originally owe as full payment. In that process, upon completion of the agreement, it also means that the collectors cannot hound you further for repaying your debt. But, on the other hand, debt settlement can destroy your credit.
Contextually, opting for the debt settlement can adversely destroy your credit, and it takes around 12-24 months to get in the original tracks! That takes in the numbers form the last credit scores to recover. But on a positive note, either way, if you have higher debt or you get onto debt settlement, the last scene can be similar. In a nutshell, it means in the longer run, and you will not be missing payments!
Now, opting for debt settlement and then deciding it for being good or bad can have various parameters. First of all, the implication has to be grounded for a factor. That means, when you are deciding for going with debt settlement, then on what grounds are you comparing the option! Let us understand in detail!
Opting for debt settlement- good or bad!
It’s true that debt settlement helps, but to make the most of the settlement program, you need to know some other essential details as well. For instance, you need to know it impacts on your credit score, debt settlement scams, the tax consequences, and lots more. Make sure to check these necessary details before you settle your debts.
The top essential facts to know before settling your due debts
The following are the topmost important facts that every consumer should know about debt settlement. Have a look at the facts below:
- Not all the settlement companies are trustworthy: When it comes to professional help, there are numerous debt settlement companies to choose from. But all of them aren’t trustworthy at all. By signing up with a fraud company, you may face unfortunate scams. So, you must check the status of the settlement company before signing up. Only the companies with proper accreditation from the Better Business Bureau are trustworthy. So, select the settlement company accordingly.
- There are tax obligations for the forgiven debt: Debt settlement may reduce the amount you owe, but there are tax obligations for the forgiven debt also. If you get to reduce the due balance up to $600 or more than that, then the amount will be considered as taxable income by Internal Revenue Service or IRS. The creditor will have to inform the IRS about forgiven debt through Form 1099-C. The more you’ll reduce, the higher will be the tax. So, there is hardly any benefit that consumers may reap.
- Credit score may get harmed: When you fail to pay off your debts, you end up ruining your credit score. Well, if you think that with debt settlement, you can improve your score, then you’re wrong. Debt settlement will be marked on your credit report for seven years. Settling the debts for less than what you owe will damage your credit score even more. Of course, the damage isn’t permanent. You can improve your credit score even after going through the debt settlement process. But you’ll have to work hard to repair the damages. It may take time. So, be ready for that.
- Settlement companies often charge high fees: Don’t expect to get professional help free of cost. Most of the debt settlement companies charge hefty fees for their services. Some companies even charge around 14% to 18% of the amount of debt you wish to settle. Of course you can expect reasonable fee structure from the legitimate settlement companies. You need to search well enough to find out a company that will not burn a hole in your pocket by charging hefty fees.
- It’s important to pay off regularly: Missing payments will not help you in anyway to make the settlement successful. You’ll have to continue your payments until all of your debts are paid. If due to some financial hardship you’re facing troubles to pay off your debts, then you must inform your creditor about that. You can even think of increasing your income to continue your payments. If you miss your payments, then it may harm your credit score even more. So just be a bit careful and prepare a repayment plan that you can follow with ease.
Well, if you are missing out on payment, that may have more to add to your credit score. Contextually, there are no guarantees that the lender will agree on a sharable term. Well, because the damage has been done through the increased rate of interest. Moreover, the Consumer Financial Protection Bureau cautions that accumulated fees and penalties on the unsettled debts could be the main reason for canceling out any savings that the debt settlement company achieves for you.
Is debt settlement the cheapest way out?
While people can hire a debt settlement firm for easing up the process, there are many who would consider doing it themselves. If you are considering hiring a debt settlement firm, there are more than just sharing your credit reports! You have to bear a fee that is contextually calculated as a percentage of the debt you enrolled in. Interestingly, if you go by the law, the firm cannot charge the fee until the debt is settled. The average fee is accounted as 20%–25%.
Next is that the debt settlement process can also entail a tax cost. According to IRS, forgiven debt is calculated as taxable income. But in case, anyhow you are able to represent your identity as insolvent, you will not have to pay the tax incurred on your discharged debt! Well, that can be quite problematic if you produce wrong witnesses and documents! In short, if your total liabilities exceed your total assets, the IRS would accept you as insolvent.
The bottom line!
If you still think that debt settlement is an expensive process, you may not be more wrong in your approach! Indeed, opting for debt settlement can be one of the cheapest ways to get rid of debts. Well, contextually, that depends on the customer. One of the major things that hold for its importance is how much you owe. Additionally, there are various other factors that decide its applicability in your context. Like whether or not you are able to forego the opportunity cost with the alternative on a similar table! So, it is essential to understand the entire concept of debt settlement before you choose it. On a more practical note, how about considering the three options for reflecting the best option for you? Indeed, what can be those, wondering, right? Does debt settlement and bankruptcy seem similar to you? Firstly, if you are struggling with debt, you can consult a credit counseling agency, a bankruptcy attorney, and a debt settlement expert! These can undoubtedly follow up with the desired answer and the best approach for your financial debts and tune up accordingly.
Moreover, it would be best if you kept all these top essential facts in mind before opting for debt settlement. In this way, you’ll be able to settle your debts successfully and improve your financial standing over time