Credit and Debt Blog

Debt settlement sure sounds good when you are getting collection calls. Imagine, you can make much smaller payments to a debt settlement company and they will help you pay cents on the dollar and avoid judgments. This is the pitch, but if you fall for it, you will really feel the sting!

Did you know that debt settlement companies do nothing more than what you can do on your own? Furthermore, many misrepresent the actual level of service they provide.

The Truth

• Debt settlement companies cannot prevent legal action. If your debt collector decides to sue, you are on your own. The debt settlement company will not represent you, and their services cannot prevent you from facing judgments. Furthermore, the larger debt balances that debt settlement companies require before they will help you are also more likely to be pursued by debt collectors in court.
• Debt settlement companies charge high fees. The upfront fees charged by debt settlement companies can reach several hundred dollars. Monthly fees can average up to $50. Most also charge a percentage of the “savings” up to 25%.
• Debt settlement can increase your income tax liability. The Internal Revenue Service views settled debt as a form of income known as forgiven debt. If you save $600 or more through a settlement, the amount is automatically reported to the IRS on Form 1099-C. Your tax bill could increase by hundreds or thousands of dollars unless you can prove insolvency.
• Your credit will suffer from settled debt. Your credit report will reflect items reported as settled for less than the full amount. This could prevent future lenders from granting credit.

If you are determined to settle your debt, then doing so on your own can be the best option. You can save your own money and even earn interest on it instead of paying it to a debt settlement company.

If you receive a court summons, then at least you will have money saved to try and avoid going to court. Remember, they just want to get paid and avoid additional legal expense. To learn more, find out about the pros and cons of debt settlement.