Can debt settlement help you pay your unpaid dues?

Are you drowning under unpaid bills? Does your phone keep ringing off the hook all day and all night because you owe creditors money? During distressing times like these, consumers often focus on just one aspect – relief. This relief does not come easy for many. In most of the cases, people feel like there is no way out. Then you see an ad in the papers or a commercial on TV that states that you can be free from all your debts in a couple of weeks. Too good to be true, right? As it turns out, maybe not.

How can debt settlement be helpful in managing outstanding debts?

It all depends on the debt settlement company, who are offering their services. Debt settlement can be a smart instrument of financial freedom. Whether you come across the terms of debt settlement, debt arbitration or debt negotiation, they all mean the same. It is the process of negotiating the outstanding debt with the company so that the lender ends up paying much less than he or she owes. Some of the companies registered with the NFCC and FCAA offer settlement programs lasting between two years and four years that allow the lenders to settle their debts for a fraction of the outstanding amount within.

How does a client pay the debt settlement company?

There is one obvious question many debtors ask before going for debt settlement – if they do not have the money to pay the monthly dues to their creditors, how will they pay the settlement company fees? The answer is a simple one if you understand the method of debt adjustment. Most credible debt settlement companies ask the consumers to stop all payments towards their creditors. Instead, they ask their clients to make their payments towards a debt settlement account. In the meanwhile, the debt settlement company tries to negotiate with the creditor once the consumer has managed to accumulate enough wealth in the debt settlement account.

Since the money keeps accumulating in the new account, the money soon becomes enough to pay the newly settled amount to the creditors. However, commonly, creditors do not allow direct payment of the dues towards the creditors, but they forward the amount. Upon settlement of the debt, the debt settlement company can collect their fee as a percentage of the amount the client has saved after paying the newly settled dues.

What is the effect of a settlement on the credit report?

If you are not working with an experienced debt settlement company, you might face significant challenges when you stop the payments towards your creditors. In the past, many consumers have found their credit score has dropped due to unpaid dues, and they have ended up owing more to the creditors than they did before the beginning of the settlement program.

After you pay off the settled debt, it will reflect as a “paid by settlement” loan on your credit report. When you seek a fresh loan in the future from the same creditor or a similar one, they will be able to see that you did not pay your past dues in full, but through debt settlement only. It might decrease your chances of receiving a new loan in the future.

Your credit report will influence your credit score. If you are paying off your dues via settlement, it will reflect on your credit scores as well. If you do not pay your dues or pay them partially, it will show on your FICO score and considerably lower it too. Case histories show that the client’s credit score can decrease by 65 to 125 points depending on the outstanding amount and creditor.

Consulting with an NFCC registered debt counselor will help you minimize the impact on your credit record. Verify their debt settlement reviews before seeking their aid. Always find a debt negotiation company with a strong history and positive client reviews for settling your outstanding debts.

Do you have to pay taxes on the forgiven debt?

Most of the times, the creditors accept a settlement that is lower than the original amount the client owed to the lending company. That generally ends the collection efforts of the creditor, but if the forgiven debt is $600 or more, you might owe income taxes on the amount.

Why do people go for debt settlement, when there is debt management?

A debt management program is one of the safest routes of controlling the debt-related expenses of a person. If you are having trouble paying your creditors, you should seek the help of a credit counselor. Most registered credit counseling providers offer their services free of charge. Anyone can opt for credit counseling sessions. They are great options for personal loans or business loans. A certified professional can help you formulate a realistic budget for the repayment of the loans. They can work in synergy with your creditors to help you pay off the outstanding amount.

A debt management program allows the client to make a monthly payment to the counseling agency, who then disburses the money to all creditors according to the agreed-upon terms. However, for many people with multiple loans, credit counseling and debt management might be a practical option since they do not have enough money to pay off their creditors. That is when they need the help of debt settlement programs to negotiate with these creditors for new terms of payment that are more feasible for their current finances.

The pros and cons of debt settlement can vary from person to person. An individual who feels troubled by the repeated collection calls and attempts from the creditors, might not care about losing a few credit scores in exchange for the long-term relief. However, if you are having transient monetary trouble that is leading to the lapse of payments, you might want to rethink your other options including personal loans, debt consolidation loans, and debt management before jumping at debt settlement programs.