What Is It?
Debt settlement is a method of resolving your debts by negotiating an agreement with your creditor to accept less than the full amount you owe. Generally, debts are settled by making a lump sum payment to the creditor in exchange for a release of any further liability on the debt.
Normally, only unsecured debts like credit cards and medical bills can be settled. Usually, first mortgage lenders and car lenders do not settle until after they have foreclosed or repossessed their collateral, sold it, and determined the amount left to be paid. Sometimes, though, second mortgage lenders will settle their debts, particularly if the real estate is worth less on the market than the current balance on the first mortgage.
How Does It Work?
Debt settlements are reached by negotiation with the creditor or its collection agency. Like in most negotiations, each side starts out asking for more than they know the other side is willing to do, but through compromise and exchange of offers the parties eventually settle on an acceptable settlement.
Of course, most people who are considering Los Angeles debt settlement or bankruptcy are having difficulty paying bills. So, the biggest issue in a debt settlement is usually obtaining the money to settle the debts. Professional debt settlement companies usually assist the consumer in setting up an escrow account or savings account where funds can accumulate. Then, when a sufficient amount is available, the negotiations begin.
Los Angeles Bankruptcy attorneys like We Legal, A.P.C. have lawyer trust accounts to hold money for clients. Where does this money come from? Usually the consumer has to stop paying on the debts he or she wants to settle. That way, the monthly payment that was going to the creditor can instead go toward settling the debt in the future. Sometimes people receive a gift, inheritance, or other lump sum that they would like to use toward settling their debts.
Of course, if a person stops paying on their credit card, they will start getting collection calls from the creditor, the account will eventually be referred to a collection agency, and the credit card company may sue for damages to try to collect the debt. And, of course, the account will be closed and reported as delinquent on the person’s credit report.
Is It Successful?
Debt settlement can be successful if the debtor is able to save the money to afford the settlements. A reasonable target is to plan on saving 60% of the balances that you currently owe on all accounts that you want to settle. That amount should cover settlements and any necessary legal fees. If it is realistic to save that amount over a 36 to 48 month period, then debt settlement may work for you. The higher the amount you need to save, the more difficult debt settlement can be. So, be careful to make sure that you can afford the plan.
One of the main problems we see with debt settlement programs is people committing to make a monthly payment that is more than they can really afford and keeps them under just as much financial distress as they were before they started the program. Often, bankruptcy is a better option with a lower payment for people who cannot afford debt settlement.
How Does it Affect Your Taxes?
Many creditors are required by the Internal Revenue Code to send a Form 1099-C for Cancellation of Debt income in connection with a debt settlement. Under the Internal Revenue Code, forgiveness of indebtedness is generally taxable as income. However, there are exceptions for people who owe more money than their assets, including any retirement accounts and home equity. Any person considering debt settlement should consult with their tax professional to understand what the potential taxes may be if they settle their debts. Do it yourselfers may want to consult IRS Publication 4681.
Note that debts discharged in bankruptcy are not taxable, which is one of the reasons why bankruptcy might be better for some debtors who could also afford debt settlement.
How Does it Affect Your Credit Score?
While no one can tell you exactly how many points your credit score will go down, you can be sure that your credit will be terrible for as long as you are in a debt settlement program and for some years beyond that. Each creditor will report your account as delinquent and then ‘charged off’ after missing six month’s payments.
Eventually your original creditor may sell the account to a debt buyer company. The debt buyer may then start reporting your negative account, too, so that you now have two negative entries on your credit report for the same debt. Multiply that by 5 to 10 credit cards and you can see that before long you can have a very messy, very negative credit report even if you are continuing to make your mortgage and car payments right on time.
If you have good credit, a single recent 30 day delinquency can knock 100 points off of your credit score. Settling a single credit card for less than the full balance can knock even more off. If you settle multiple cards, you can expect even worse. And, of course, this negative credit persists the entire time you are in the debt settlement program and beyond. So, do not imagine that debt settlement will improve your credit in the short run.
If you have bad credit already, then debt settlement is not a path to an early improvement of your credit score unless you have the funds on hand right now to settle all of your debts and begin rebuilding your credit.
For more information about credit scores, we refer clients to the leading credit scoring company in the United States, the Fair-Isaac company. Their consumer website, www.myfico.com, has substantial information about credit scores and how consumers can improve their scores. This sample credit score example shows what happens to credit scores when consumers are no longer able to pay their debts on time.
What Does It Cost?
Debt settlement companies typically charge large fees, most of which consumers are required to pay even before any settlement work is done. Often the companies charge an additional fee when the debt is settled, plus monthly maintenance fees. Typically these fees, by themselves, can be 15 to 20 percent of the amount that you owe. At We Legal, A.P.C., we handle your debt settlements on an hourly basis for our actual legal time involved, or for a fixed fee in some cases. That way, you are paying only for the actual value of the services you receive from us.
Also, since our Los Angeles Debt Settlement services do not have to pay for substantial advertising, sales commissions, or other promotional costs, you can expect in most cases to pay us substantially less than a Los Angeles Debt Settlement company. However, that may not be the case if your debts are relatively small or your total debt is relatively small. After all, if you owe a $250.00 utility bill, it would probably be cheaper for you to just pay it rather than trying to hire us to negotiate it for you. But, if you have a $25,000 credit card, why pay a debt settlement company $3,000 or more for something that might only take a few hundred dollars of attorney time to resolve.
Why Hire We Legal, A.P.C. Instead of a Debt Settlement Company?
First of all, be very careful about any debt settlement company. Carefully research on the internet any complaints against them, their Better Business Bureau rating, and their pricing. Many debt settlement companies have been the targets of states’ Attorneys General and the Federal Trade Commission for violating state and federal law. Those violations include misrepresenting to consumers the likely success of their programs and concealing or misrepresenting important information that should have been disclosed to consumers. Here are links to some of these reported investigations and information:
FTC Settlement Bans Financial Future Network LLC from Debt Relief Business
The FTC Guide to Debt Relief Services
The Government Accountability Office Report: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers
Among the main concerns we see most commonly with debt settlement companies are overcharging and over-promising services, together with failing to tell consumers that the telephone calls and lawsuits from creditors are going to come and that the debt settlement company is going to do nothing about it.
When you hire We Legal, A.P.C. to handle your debt settlement process, we will be there for you if you get sued. Also, third party debt collectors are prohibited from calling your or otherwise trying to collect from you (except by taking legal action) while you are represented by an attorney. We can help you carefully consider whether bankruptcy, debt settlement, credit counseling, or other options are best for you. But, if you call a debt settlement company, all they have to offer you their debt settlement program.
If you fail to complete a program with a Los Angeles Debt Settlement company, all those fees you paid at the beginning are probably lost for good. With We Legal, A.P.C., you pay as you go for the services you use when you use them, so if something changes mid-way through your plan and you need to, for example, file bankruptcy, you will not have spent money for services you are never going to use. If a debt collector or creditor is violating federal or state collection laws, we can sue on your behalf and potentially recover money that can be used to settle your debts or for other purposes. A debt settlement company cannot do that for you.
Finally, here you can always come see us face to face and talk about your concerns with an attorney who is on your side. We hope you will call us and make an appointment for a comprehensive, fair review of your financial situation and our best, unbiased advice about what options are available to you. Call us at (877) 674-1021 to make an appointment.