Debt settlement provides a bankruptcy alternative to individuals able to pay a portion of their outstanding debts. Debt settlement companies negotiate with creditors to reduce the amount of outstanding balances. In some cases, debts can be reduced by as much as 60-percent.
Using debt settlement can adversely affect the debtor's credit rating. However, it is not as detrimental as filing bankruptcy. Both personal and business bankruptcy remains on your credit report for ten years, while the effects of debt settlement are temporary.
Debt settlement companies can oftentimes help debtors reduce balances on credit cards, department store and gas cards, unsecured personal and student loans, repossessions and collection accounts. Debt settlement companies cannot assist with mortgage notes, secured loans, child support or delinquent taxes.
Debt settlement companies usually charge a start-up fee and monthly service fees. The average fee is approximately 15-percent of the total debt owed. For instance, if you owe $100,000 in debt, the debt settlement company may charge $15,000 to negotiate debts.
Reputable debt settlement companies can reduce debts by as much as 60-percent. Using the figure above, this would save debtors $60,000. However, the debtor would owe the debt settlement company 15-percent; making their overall savings 45-percent.
It is important to note the Internal Revenue Service may charge a capital gains tax on the negotiated amount. If you save $45,000, the IRS could charge tax on this amount. Therefore, debtors should obtain tax counseling prior to signing debt settlement contracts.
The duration of debt settlement programs is usually one to three years. Debtors are prohibited from incurring new debt while engaged in a debt settlement contract. Repayment plans can be quite stringent.
Most require debtors to contribute a large percentage of their disposable income toward payment of outstanding debts. However, individuals who are serious about eliminating debt oftentimes find debt settlement to be the best choice.
When selecting a debt settlement company, it is crucial to thoroughly investigate the organization to ensure they are a reputable source. Check with the Better Business Bureau and conduct research via the Internet.
Last, but not least, realize creditors are not obligated to work with debt settlement companies. However, you can improve your chances by working with an established debt settlement company.
Prior to making a final decision, take time to research all debt reduction options. These include credit counseling, debt management, debt consolidation and budgeting. We invite you to begin your research in our personal money management article library.
Published on December 07, 2008 at 11:36 AM | Comments: 1
| | Printer friendly