What are the Negatives of Debt Settlement?
To define the term, debt settlement is an agreement an individual makes with a creditor to pay off a debt by paying a percentage of it in a lump sum. Usually the amount is at least 50% to 75% but sometimes you can get the amount lower than that if you can prove reduced income or other financial distress.
So what could be a down side of getting your debt reduced? Be aware that debt settlement companies will charge you a fee that is a hefty percentage of the total due. Also, credit companies won’t settle your debt if you are current. You have to be significantly behind in your payments to even qualify. Debt settlement will damage your credit even if the settled amount shows a $0 balance on the debt. You have not paid the debt in full as was originally agreed to. There are also taxes due on any forgiven balance over $600.00. You need to make your tax preparer aware of any settlements you have made backed up with the appropriate paperwork. Make sure you get the settlement terms in writing from the creditor.
All of these negatives need to be considered before one decides to do a debt settlement. A good non-profit organization that works with repairing and improving credit will walk you through a settlement for free.
The Alliance for Consumer Protection, Beaver County PA is available to answer your questions.
Melody Logoyda
ACP Executive Director