What You Should Know Before Engaging a Debt Settlement Agency

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For people facing crushing levels of debt, debt settlement companies can offer a practical way of getting their finances back on track. A recent American Fair Credit Council study reveals that 90% of people participating in debt settlement programs manage to resolve a minimum of one account in the first eight months and the amount of settlement is a little less than half of the initial balance. Impressive as that may look, it does not mean that you can rush headlong into entering into an agreement with the first debt settlement agency you encounter. After all, in a matter that is as sensitive as your financial profile, you need to be really savvy about picking a company that can deliver on its promises. Some tips on what you should be on the alert for:

Debt Settlement Requires Patience

Even though it is proven that debt settlement can be effective in winding down your accumulated debt, the process itself needs to be rather long-winded for best results. While more than 50% of the participants of a debt settlement program start settling their accounts in the first four months, for best results you need to allow 24-48 months to settle all the debt. While the agencies can never assure that they can block every debt collector, usually they are quite effective in stopping your harassment by collection agencies.

Examine Other Alternatives

Even though debt settlement has proven to be quite effective, it is not your sole option. You can choose from a variety of debt relief alternatives such as credit counseling, debt consolidation, and bankruptcy. Counseling and debt consolidation loans can prove to be quite workable if the total debt is below $10,000. You get rid of multiple debts even though the total debt remains the same. Because it takes as much as seven years to wipe off the debt, these programs typically witness very high dropout rates. You can also file for bankruptcy to keep creditors off your back but qualifying under Chapter 7 is now more difficult compared to Chapter 13. However, Chapter 13 bankruptcies are reflected on your credit report for as long as 10 years and you still have to pay some portion of the debt. For more insights, you can refer to the many debt settlement reviews available online.

You Can Be Liable To Tax

When creditors agree to a debt settlement, the amount waived is reported by them as a business loss to the IRS for the purpose of tax deduction. The IRS then treats the waiver amount as income in the hands of the debtor and makes him liable to pay income tax. However, there are exceptions that you can avail of if you qualify.

Your Credit Score Will Be Negatively Impacted

By undergoing debt settlement, you will invariably end up damaging your credit score. This is because, in order to convince that you cannot pay creditors in full, the settlement agency will advise you to hold up your payments. Also, stopping the payments is typically the only way debtors can save up enough to pay a lump sum required to settle the debt. The payments that you miss making will be reported by the creditors to the credit rating agencies and this will drive down your credit score.

Conclusion

Given the heavy use of plastic money and the vast temptations that surround customers, it is small wonder that credit card debt is becoming increasingly common. If your profligacy continues for an extended period, you could find yourself mired deep in debt and struggling to make even the minimum payments. If the debt amount is small it makes sense to talk directly to your creditors, however for larger amounts engaging a professional debt settlement agency, despite the expense, is worth the while because it can take a lot of expertise and experience to negotiate fruitfully with creditors.

Author bio: Susan Jenkins is a personal finance counselor working for a leading finance company. She advises customers facing debt management issues to consult a reliable counselor and also get familiar with the subject by reading debt settlement reviews online.

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