You have probably seen or heard advertisements for "debt settlement" programs that promise to protect you from creditors and pay all of your debts for a fraction of what is owed or for "pennies on the dollar". There is one problem with these programs - THEY WON'T WORK. Whether you have just heard the ads or if you are now making payments to a settlement company you need to know that the debt payment plan being promised simply will not work.
The way debt settlement is supposed to work requires that you make a payment every month to the debt settlement company.
The amount of your monthly payment depends on the amount of your credit card debt. The company then accumulates these funds, and takes their fees, while they send letters to all of your credit card creditors offering to pay some percentage of the debt, maybe 50%, in one lump sum settlement. It will take many months for the settlement company to negotiate with the credit card lenders and work out a payment amount.
Then, assuming they have enough of your money to pay the negotiated amount, they will then pay the account to settle the first debt and then make an offer to another credit card lender, (they work from smallest debt to the largest) and try to settle the next debt all while you are making monthly payments to them. There are many, many reasons why this format to attempt to get rid of debt will not, and will never, work.
As in traditional credit counseling, debt settlement programs will only attempt to settle credit card debts. Thus if you also have medical bills, repossessions, secured debt problems, or any other kinds of debt, a debt settlement program cannot take care of those debts.
Although the settlement companies will tell you that once they are retained they will stop all other collection efforts against you ----- that simply is not true. Any credit card company can, and many will, simply ignore any communication they might receive from the debt settlement company and continue to call and send bills to you and file a lawsuit, get a judgment, and garnish your wages. This will happen even while you are making monthly payments to the debt settlement company, and they cannot do anything to stop it.
The fee charged by the debt settlement companies is outrageous. They take their fees directly out of your payments. It is not uncommon for a settlement company to take 3 to 6 months of your payments just to pay their initial retainer fee. Then they will take 20% to 40% of each monthly payment for additional fees. At this rate, it is very difficult to accumulate the funds necessary to attempt a payoff or even a small balance credit card.
All the while the debt settlement company is accepting your monthly payments and taking their fees, interest is accruing on your accounts at the highest possible rate allowed by your credit card agreement, probably 30%. Thus the debts that they are trying to settle just get larger and larger, obviously making the possibility of settlement much more difficult and expensive each month.
There exists no law that requires credit card lenders to negotiate with these debt settlement people or even to talk to them. Many credit card lenders will not, ever, agree to take a lesser amount in full settlement of the debt. Any so-called "guarantees" made by the debt settlement company are worthless as many of your creditors will simply ignore the attempts to settle and continue to come after you with harassing phone calls, billing demands, lawsuits and garnishments, and nothing can be done by the settlement company to stop these collection efforts or force them to negotiate.
If you do manage to get one of your credit card debts settled, say for 50% of what is owed, the credit card company is required by Federal law to send a Form 1099 to the Internal Revenue Service stating that the amount of the debt that was forgiven and not paid must be treated as income to you on your following year's tax return. Thus you are required to show on your tax return the amount of the forgiven debt and you are taxed on that amount as if it was income to you.
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