What You Should Know About Debt Settlement, Part II

Debt settlement may sound like the perfect solution to your financial problems… but it may hurt more than help

In Part I of this article, we looked at the scary concept of debt settlement. You may never need to worry about such a thing; but if your financial matters do happen to go awry, you ought to know how to handle yourself, especially if you hire a company to handle your settlement negotiations.

As we pointed out last time, some companies “help” 0 by charging huge fees, and then delay paying your creditors while you pay their fee first. Not every settlement company does that, but enough do that it’s standard practice.

But Wait, There’s More!

Never forget that debt resolution companies aren’t your friends; they care about your money problems only insofar as they can profit from them. Front loading and big fees are just the beginning.

For example, they may urge you to stop paying your creditors, instead making payments into a third-party account while they negotiate the deal. This is a mistake, because negotiations can take months…and your debt will grow the entire time.

This may further damage your credit, and your creditors may even obtain legal judgments against you, including wage garnishment.

Paved With Good Intentions

Even if you do find a settlement company that helps you minimize your debt load so you can get things paid off, your financial distress may not be over.

First, don’t assume that the black marks you’ve acquired will be expunged from your credit report. Even if you do reach satisfactory settlements, those credit entries will be marked “Paid by Settlement” on the report; and let me assure you, future prospective creditors will look askance at that.

This may also lower your credit score significantly, so you may not be able to get loans and credit you need later, even though you paid off your bills.

Tax Penalties

The IRS has a quaint habit of viewing forgiven debts as income. (They do the same with home foreclosure sales). This being the case, they’ll expect you to pay taxes on any forgiven amount greater than $600. This can end up being pretty painful.

The Bottom Line

At the end of Part I, I asked regarding resettlement, “Is it worth it?” Personally, I think dealing with settlement companies is more trouble than it’s worth, and even handling the settlement negotiations yourself is fraught with peril.

In the end, it boils down to how much you owe and how well you can tiptoe through the minefield. If your bill’s moderately low, it may be better to just pay it off, even a small amount at a time; ditto if you don’t have time to deal with all the issues besetting the option of debt settlement, or just don’t understand them.