Thursday, September 2, 2010

What is debt settlement

What is a debt settlement service? You have probably seen many advertisements stating that they can help you settle your debts for a lower amount. With most of these companies, for a fee, a professional debt-settlement company will help you get rid of your debt for as little as half the amount you owe.
I don’t have any personal experience with a debt settlement company but will share information I have learned about it. It works for some people and some share horror stories about it.
Most creditors will not settle with people until they are in real hardship, which means they are not able to make their payments. In some stories, the debt settlement companies tell their clients to stop making payments and that ruins their credit scores even worse than they were to start with.
The fees charged by these companies vary by firm and are not always easy to determine what the fees are.
Some creditors will settle accounts for less than you owe if you are able to make a one-time payment. In these cases some may settle for between 20% and 75% of what you owe and the creditor will forgive the rest of your debt and will report it to the credit bureau as settled. However, when you settle like this it is considered taxable income. Any forgiven balance over $600 you will owe taxes on that amount. For example, if your tax rate if 15%, $5,000 of forgiven debt will have a $750 tax liability.
So if you are drowning in debt a debt settlement company may sound like an easy fix but you need to do more research before committing to this solution.

Consumers are being warned to exercise extreme caution in dealing with companies that offer to reduce credit card debts. The warning follows a little-noticed rule announced by the Federal Trade Commission which is likely to put many put of these firms out of business in the next few months, but only after they have collected millions of dollars in fees without providing any service.

On July 28th, the FTC adopted a rule that prohibits firms from collecting upfront fees from consumers in debt settlement cases. Instead, they will have to wait until at least a partial settlement is made before collecting their fee. They will also be forced to disclose how long the process will take and the possible negative consequences of using a debt relief service.

The new rule does not take effect until Oct. 27, and the debt settlement companies are still advertising their services and may legally continue to collect these fees until the cutoff date.

What happens to the consumer when the company goes under? Under the typical contract with debt settlement companies, consumers stop paying their lenders and instead pay into an escrow account for both the fees and the balance on their credit card debt. The escrow accounts are usually at third party institutions, but there is nothing in the current law to prevent a company from closing on Oct. 27 and taking its fees without performing any service.

See full article from Daily Finance.

Whatever method you use to get out of debt. One of the first things you need to do is take a look at your spending. If you do not get your spending under control, you will be in the same bind soon again.

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