What You Need To Know About Debt Settlement Companies
Almost everyone finds themselves in debt at some point in time these days and everyone needs help to resolve this issue. People need to scrutinize any companies or service providers that you may seek help from because it often happens that the cure may end up being worse than the ailment. Debt-settlement companies are not the same as credit counseling companies. A debt-settlement company helps you through the process negotiating down your total debt. This only happens when you stop making any payments. The late fees, interest and penalties continue to build. However, you put money aside in an escrow account. When enough money has accumulated, the debt-settlement company will contact your creditors and attempt to get them to accept a much smaller amount, say 10% to 50% of the total you owe, and write the rest off as bad debt.
The catch with these companies is you can pay off your debt and get rid of the burden for less than what you actually owe. However, you should keep in mind that:
- It won’t save your credit,
- Creditors don’t always accept the lower offer,
- There could be tax consequences.
The process of debt settlement is like playing a high-stakes game of chicken. Debt settlement programs require their consumers to stop paying bills and allow their debt to go into delinquency and default. Instead of paying their creditors, consumers pay the debt-settlement firm a monthly amount that gets put into an escrow account. Debt settlement companies want creditors to think that the debt is a total loss and there is nothing to gain so when they offer the creditors a lesser amount, they’re more likely to accept it. In the meantime, however, the collection calls keep coming. In fact, calls have been known to escalate as the debt increases in delinquency. Interest rates are raised and late penalties are added by the creditor. These continue to accrue as bills are not paid. A debt-settlement firm can’t stop creditors from suing consumers.
Almost one-third of debt-settlement consumers enrolled with a California company face lawsuits from their creditors; in some cases, consumers aren’t even aware of the legal action until their wages start being garnished. The Federal Trade Commission’s Telemarketing Sales Rule made an amendment in 2010 that made it illegal for for-profit debt-settlement firms to charge upfront fees. Firms are not allowed to collect any fees from a customer before they have settled or resolved her debts. Consumers have to begin payments when they enroll in a debt-settlement program and these are payments for the escrow account usually held by a third-party firm. If they settle a customer’s debts one by one, firms can collect a fee for each debt they’ve negotiated.
In the US a multitude of debt-relief options are available each having it’s pros and cons. Education and advice on credit and borrowing is often provided by nonprofit or government organizations. Debt management plans are typically offered by nonprofit credit counseling firms, which negotiate with creditors to set up payment plans allowing consumers to repay their debts in full with lowered interest rates than what consumers were charged beforehand. Debt management plans lower a borrower’s monthly payments. Interest-rate reduction might knock a $500 payment down to $400 Debt-settlement companies accept whatever funds the borrower has available for the monthly escrow payments, and that’s why some people who can’t afford debt management turn to debt-settlement as an alternative.
Bankruptcy is another option available for debt relief. Chapter 7 bankruptcy discharges all eligible debt including credit card debt. Chapter 13 is a type of debt-settlement plan in that it requires creditors to be repaid over time often less than the total amount owed. There’s nothing to prevent a consumer from negotiating with his creditors directly. However, dealing with multiple creditors requires organization and persistence. If you are faced with debt related problems it is imperative to seek the advice of an experienced and resourceful legal firm like Chang & Diamond, APC.
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