Comparing Credit Claim Attorneys In Boston: Factors To Consider – If you’re in debt and can’t pay your bills, is a debt settlement program the cheapest way to get out of debt? You might draw that conclusion from a recent report by the American Fair Credit Council (AFCC), an industry association of companies operating in the debt settlement industry.
Debt settlement, also known as debt relief or debt adjustment, is the process of settling a debt for much less than you owe by promising the lender a substantial lump sum payment. Depending on the situation, loan settlement offers can range from 10%. Up to 50% of the amount you owe. The creditor must then decide whether to accept.
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“Debt settlement can save consumers money by allowing them to settle their debt for less than the full balance,” notes Gerri Detweiler, co-author of the e-book.
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“It can be a way out of debt for some people who can’t repay the full amount they owe,” she adds.
Consumers can try to settle their debts on their own or hire a debt settlement company. In the latter case, you will pay the company a fee calculated as a percentage of the loan you signed up for. Enrolled credit is the amount of credit you have when you enter the program. By law, the company cannot collect this fee until your debt is settled. Fees average 20% to 25%.
Debt settlement may also include tax charges. The Internal Revenue Service (IRS) generally treats forgiven debt as taxable income. However, if you can demonstrate to the IRS that you are insolvent, you may not have to pay taxes on the discharged debt. The IRS will consider you bankrupt if your total liabilities exceed your total assets.
According to AFCC data collected by Freedom Debt Relief, one of the nation’s largest debt negotiators, debt settlement is often the cheapest option compared to debt counseling or making minimum monthly payments, as the infographic below shows.
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However, whether debt settlement is the least expensive option for you depends on the specifics of your situation.
Ironically, consumers who enter a debt settlement program because their debt burden is unmanageable—but are still making payments, even sporadically—have less negotiating power than those who don’t. Therefore, the first step is often to stop making payments altogether.
“Credit scores can suffer during the debt settlement process, especially in the beginning,” says Sean Fox, co-president of Freedom Debt Relief. “As the consumer begins to make payments on the settled debt, the credit score will usually recover over time.”
Being delinquent on a loan and settling the loan for less than you owe can have a severe impact on your credit score – possibly sending it into the mid-500s, which is considered poor. The higher your score before you fall back, the bigger the drop. .Late payments can stay on your credit report for up to seven years.
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Missing a payment means collecting late fees and interest, which will add to your balance and make it harder to pay off your loan if you can’t pay. Consumers can expect harassing debt collection phone calls after becoming delinquent. Creditors may decide to sue consumers for debts over $5,000 – in other words, debts that could result in wage garnishment.
“If you have more money to pay off, you can pay off the debt faster. The more you default on your loan, the higher the risk of litigation,” says Detweiler.
Once you have this damage, there is no guarantee that the lender will agree to settle or settle the debt for as little as you hoped. For example, Chase may not work with debt settlement agencies. It only works directly with Licensed credit counseling agencies that assist consumers or nonprofits. The Consumer Financial Protection Bureau (CFPB) warns that accrued fines and fees for unpaid debts can negate the savings the debt settlement company makes on your behalf, in particular. Pay off all or most of your debt.
When the process works as intended, everyone involved in debt settlement can benefit. Consumers save money by getting out of debt, debt settlement agencies make money for providing a valuable service, and creditors get more money than they would if the consumer stopped paying altogether or entered Chapter 7 bankruptcy. Chapter 7 bankruptcy involves liquidating the debtor’s non-exempt assets and using the proceeds to repay creditors. Exempt assets vary by state, but often include household and personal property, some amount of home equity, retirement accounts, and a vehicle.
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Compared to debt settlement, Detweiler says, “If a consumer qualifies for Chapter 7 bankruptcy, it can be a faster option. It’s a legal process that can stop collection calls and lawsuits. Debt settlement doesn’t offer those guarantees.”
However, she adds, “There could be a variety of reasons why Chapter 7 is not a good option. A customer may have to hand over property they feel they should keep. Or maybe they don’t want their financial problems to be a public record.
Some employers check applicants’ credit history as part of the hiring process, so their employment options may be limited if individuals declare bankruptcy.
Another problem that many indebted consumers face is not being able to afford a bankruptcy attorney. In some cases, the court may refuse to file them.
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“Many consumers cannot qualify for bankruptcy protection,” Fox says. “In contrast, debt settlement is available to any consumer who can demonstrate financial hardship and is struggling to make progress, such as job loss, reduced work hours, medical expenses, a death in the family, divorce, etc. Paying off their debts. “
Chapter 7 bankruptcy can be completed in three to six months, versus what can be years for debt settlement. It can be less stressful and allow your credit score to recover faster, but bankruptcy can stay on your credit reports for up to 10 years.
Most debt settlement programs require you to deposit a certain amount into a specific savings account each month for 36 months or more. Before you sign up for a program, make sure you can afford to make the deposit for the entire duration of the debt settlement program.
Making minimum monthly payments on high-interest loans is not a good option for consumers looking to save money. Depending on how much debt you have and what the interest rate is, it could take years – even decades. Interest is typically compounded every day on your full balance, and with minimum payments, you’ll make little progress toward paying off your balance each month.
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Consistently making minimum monthly payments and paying tons of interest will give high profits to your creditors. A strong payment history is good for your credit score, but spending on interest is a very expensive way to raise your credit score. A good credit score doesn’t pay for your retirement; Will be money in the bank.
Also, if the amount of credit you’ve used is high relative to your credit line, it can hurt your credit score and negate the impact of your consistent, on-time payments.
Consumers who make only the minimum monthly payments on high-interest credit card loans may end up paying more in interest than the original principal amount.
Credit counseling is a free or low-cost service offered by some nonprofit and government agencies. Interestingly, these services are often partially funded by credit card companies. By signing up for a debt management plan with a credit counseling agency, you can get interest rate reductions and penalty fee waivers on your balances.
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Those concessions may or may not be enough to help you pay off your debt significantly faster, and you may or may not be able to afford the new monthly payments you need. In addition, you may not be eligible for reduced interest rates even if you have significant financial hardship.
However, because you don’t have to default on your loan, your credit score may go down. Also, debt counseling can provide additional financial assistance to help you avoid similar problems in the future, such as budgeting and financial counseling, as well as referrals to other low-cost services and assistance programs.
So, how do you know which option to choose if you don’t want to file for bankruptcy? It is usually better to seek debt counseling before you hire a debt settlement company. Credit counselors can help you decide the best course of action. It may involve debt settlement, but in a way that benefits you. On the other hand, a debt settlement company may be more interested in your rates than the health of your credit.
Credit counseling and credit consolidation loans are appropriate for consumers with more moderate financial stress on the spectrum of financial hardship. At the same time, debt settlement and bankruptcy can help those with more significant financial pressures. It depends a lot on the individual situation.
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The Federal Trade Commission’s website has helpful information on how to choose a credit counselor. The National Foundation for Credit Counseling is another
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