Why is Debt Settlement a Bad Idea?

Posted By San Diego Bankruptcy Pros || 8-May-2017

Many people don’t want to declare bankruptcy but are still struggling with crippling debt and don’t know where to turn. This has led to the rise of an immense number of debt relief companies who claim they can resolve your debt quickly and easily for a lowered payment and without the impact to your credit score that declaring bankruptcy usually entails. Sound too good to be true? Probably because it is.

Debt settlement in many cases isn’t all it appears to be. Before signing anything, you should make sure you fully understand the ramifications of using one of these companies, including all the fine details on how it will impact your credit. What you learn may stop you from signing the contract.

How Debt Settlement Works

Let’s take a closer look at the debt settlement process. You give the names of your creditors and how much you owe each of them to the debt settlement company, who plugs the data into a computer and then quotes you a new low monthly payment. They then advise you to stop paying your creditors and instead make just your payment to the settlement company.

The settlement company then puts the money you pay them into a savings account which then grows over time as you make payments. Once your account reaches a certain level, the company calls your creditors and starts negotiating a settlement with them, usually one at a time. When the creditor agrees to the amount, the settlement company then pays the creditor and assesses a fee, which can be either a flat fee or a percentage of the debt that was settled.

Sounds okay, right? Well you may have noticed that you stopped paying your creditors. Creditors don’t typically settle debts until they’re a few months past due, so odds are you’re going to have missing payments reported to credit bureaus which will place a huge hit on your credit score. Once the delinquent payments are settled, they don’t come off your credit record, but instead are reclassified as “paid-settled,” which is nowhere near as good as a “paid in full” result. This can still come back to haunt you for months or even years on your credit report.

Furthermore, the creditors can issue you a 1099C for cancellation of the debt in the amount of debt forgiven. This amount can be deemed taxable income on your tax return. This is typically not the case if the debt is discharged through a bankruptcy.

In addition, while your settlement company saves up your payments to try and settle with one creditor, your other creditors may get sick of waiting and sue you. This is when your debt settlement company typically informs you that you should retain a bankruptcy attorney, which is probably what you should have done from the start. You can avoid much of this hassle by simply speaking with a San Diego bankruptcy attorney to find out if declaring is right for you the first time. You will likely save a lot of time, money and unnecessary stress by speaking with an attorney from the beginning.

When you call San Diego Legal Pros to help you with your case, our team of San Diego Bankruptcy Attorneys can help you navigate the complexities of your financial situation with confidence. We are experienced in bankruptcy law, and work hard to ensure you are cared for and your rights are protected throughout the process. Our attorneys tailor our strategies to your needs and can help you obtain financial freedom and independence once again in the best possible manner.

Want to find out if bankruptcy is right for you? Call San Diego Legal Pros today at 888-875-9190 for a free case evaluation!

Categories: Financial Problems

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