To put it very simply, debt settlement companies get your creditors to agree to forgive some of your debt. However, their services can be expensive and there may be significant unforeseen consequences. Until recently, debt settlement companies were not regulated by the Federal Trade Commission. Some of their practices may be fraudulent and illegal.
Look out for substantial fees, possible lawsuits & damage to your credit score
Debt settlement companies typically charge a large up-front fee and monthly fees for their services. If you can't pay the up-front fee in full, they will set-up an installment plan. They might tell you to stop making debt payments and stop communicating with your creditors. However, negotiations with your creditors may not begin until the up-front fee is paid in full. In the meantime, your creditors may sue you to collect the debt. If they win, they have the right to garnish your wages or put a lien on your home. These actions negatively impact your credit score.
Be aware - forgiven debts are taxable income
The difference between the amount you originally borrowed and the settlement amount is added to your income for taxation by the Internal Revenue Service. You should consider this tax liability when you are weighing the costs and benefits of a debt settlement contract.
Do it yourself
Debt forgiveness is not a new concept. There's no need to hire a company to handle the transaction. With a little negotiation skill, you can settle your debts by yourself. Simply contact your creditor and make a proposal.
Some debt settlement companies provide legitimate services
The Federal Trade Commission published a Debt Settlement Industry Standards Fact Sheet that includes a list of what to look for in a reputable service provider.
Debt Management Program at CCCS of Rochester
Debt Management Program
No Government regulation - some are being shut down
Licensed by the NYS Dept. of Financial Services, EOUST and HUD
Debtor pays < 100% of their debt
Debtor Pays 100% of amount owed
Large fee paid up front
Small fee paid monthly
Recommend clients withhold payments from creditors
Monthly payments to creditors start immediately
Client's credit score adversely affected
No direct effect on credit score - timely payments improve score over time
Income tax obligation for amount forgiven in settlement
No income tax obligation
Little client support
Strong client support
No Guarantees of success
50 years of successful debt management counseling
They are For Profit companies
Not for profit agency using earnings to support programs and financial education
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