A debt settlement or debt negotiation program is an option worth to consider if you’re deep in debts. If you don’t know how to deal with your debts enrolling in such a program is a better choice than filing for bankruptcy.
Many consumer financial services today offer debt settlement programs for people fighting to recover from debt problems. These settlement plans are a very convenient and result-oriented method for getting out of debt in a short amount of time.
Is it right for you? Read on to learn how a debt settlement program works as well as its risks.
How a Debt Negotiation Program Works
Enrolling in a debt settlement program is relatively easy. Simply contact a reputable debt settlement company you can find on the web. Either offline or online advisors will recommend you on how to fill out the debt negotiation form. And the consultant or the site will also check the debt settlement program and how it works.
After evaluating whether you are qualified for the debt negotiation plan, the debt counselor will tell you the monthly funds you need to accumulate to meet the debt settlement payments. Depending on your financial situation the counselor may also suggest you to set aside a lump sum funds to put towards settlements.
Once you start accumulating the settlement funds, the consultant will let know your creditors on your behalf. From then on, the debt settlement firm will handle creditors’ calls and will negotiate installment settlements for you. This way you will only have to work through that single representative, and not through all of those creditors.
Risks of a Debt Negotiation Program
Even though a debt negotiation plan offers a better debt solution than filing a bankruptcy, it has some risks you need to take into account. Here is a list of its major disadvantages.
- The money you pay to the debt settlement firm is deposited in an account and is held until there is enough to negotiate debt settlements with creditors. This means that interest and late fees will be accrued on your debts during the non-payment. And depending on the creditors’ policy, if there is no payment your bills will be sold to credit collectors.
- During the negotiation period, the debt negotiation company will recommend you to send your payments to your account instead of to your creditors. As a result your creditors will be reporting your non-payment problem to the credit bureaus, which then will record these items to lower your credit score.
- Once you stop paying your creditors, they will contact you often. They will take every possible way — such as filing a lawsuit or garnishing wages — to get their money back.
- The forgiven debts you get from debt negotiation are a taxable income. The higher the amount the higher your tax bill will be at the end of the year.
Considering the short-term risks, you need to get a comprehensive advice from a reputable settlement company before enrolling in any debt negotiation program.