Debt settlement: What is the cheapest way out of debt?

What is Debt Settlement?

Debt Settlement, also known by “debt relief”, “debt adjustment” or “debt reduction”, is the process where you promise the lender a substantial lump-sum payment to resolve your delinquent loans. Depending on the situation, debt settlement offers might range from 10% to 50% of what you owe.3 The creditor then has to decide which offer, if any, to accept. Take look:

Consumers have two choices: either they can settle their debts, or they can hire a debt settlement agency to handle it. In this instance, the firm will charge a percentage to your enrolled debt. Enrolled debt refers to the amount of debt you have at the time that you sign up for the program. By law, the company can’t charge this fee until it has settled your debt. Fees average 20% to 25%.

In addition to tax costs, debt settlement can also result in tax savings. Forgiven debts are considered taxable income by Internal Revenue Service (IRS). However, if you can show the IRS that you’re insolvent, your discharged debt will not be subject to tax. The IRS will consider you to be insolvent if your total liabilities exceed your total assets. It’s best to consult a certified public accountant to determine if you qualify for insolvency status.

Freedom Debt Relief, a prominent debt negotiator in the country, compiled AFCC data and found that debt settlement was far more affordable than credit counseling, or making minimum monthly repayments. See the infographic below.

Strategies and risks for debt settlement

Ironically, consumers who enter a debt settlement plan because they are unable manage their debt burdens, but have continued to make payments, even intermittently, have less bargaining power than those who made no payments. It is essential that they stop making any payments. Freedom Debt Relief cofounder Sean Fox states that credit scores may be negatively affected during the debt settlement process. “Credit scores usually improve as consumers begin to make regular payments on settled credit debt.”

Your credit score can be severely affected by being indebted and paying off less debt than you owe. The more you fall behind on your credit score, the greater the impact. Late payments may remain on your credit report for up to seven years.6

Late fees and interest accrue if you fail to make regular payments. It will make it difficult to pay off your debt. When a customer becomes indebted, they may be subject to harassing phone calls regarding debt collection. Customers with debts of more than $5,000 might be sued by creditors. Wage garnishment is possible if the creditors are justified in their actions. “The faster you can settle the debt the more money that you have. Detweiler said that the greater your risk of being sued if you leave debt unpaid,

There are no guarantees the lender will offer a settlement, or even if it agrees to pay the amount you requested. Chase, for instance will not work in conjunction with debt settlement agencies. It will only deal directly with consumers and with licensed credit counseling agencies, which are nonprofits that help consumers. The Consumer Financial Protection Bureau (CFPB) cautions that the accumulated penalties and fees on unsettled debts could cancel out any savings the debt settlement company achieves for you, especially if it doesn’t settle all or most of your debts.7

Bankruptcy Settlement vs. Debt settlement

The process of debt settlement can be beneficial for all parties if it goes as planned. Consumers are able to pay off their debts and save money. Debt settlement firms can make more money by offering valuable services, while creditors will get more than they would receive if the consumer stopped making payments or declared bankruptcy. Chapter 7 bankruptcy involves liquidating the debtor’s non-exempt assets and using the proceeds to repay creditors.8 Exempt assets vary by state but often include household and personal possessions, a certain amount of home equity, retirement accounts, and a vehicle.

Detweiler stated that bankruptcy chapter 7 may be faster than debt settlement. It is a legal procedure that can stop lawsuits and collection calls. While debt settlement does offer no guarantees, he said that chapter 7 could not be a good option for many reasons. Consumers might be forced to sell property they do not want. A consumer may decide not to have their financial troubles made public. Additionally, some occupations will evaluate a worker’s credit history and limit their options for employment.

Another problem that many consumers with high debts face is the inability to afford a bankruptcy lawyer. Fox states, “Many consumers can’t qualify for bankruptcy protection.” “However, anyone can apply for debt settlement if they are unable to show a financial hardship. This includes a job loss or reduction in hours, medical expense, a death, divorce, or any other circumstance that could lead to them having to make significant progress in paying off their debt.

Chapter 7 bankruptcy is usually completed within three to six weeks, as opposed to several years for debt resolution. It can be less stressful and may allow your credit score to recover faster, though bankruptcy will remain on your credit report for 10 years.

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