Compared with debt management programs, debt settlement is a more aggressive option.
This type of program is geared towards debtors who have fallen on some type of financial hardship. First, the debtor stops making payments to their creditors and, instead, begins to save up funds (usually in some form of escrow or trust account). After the debtor has saved up a reasonable amount of funds, the debt settlement company begins trying to settle the debtor’s enrolled debts.
Debt settlement, like debt management, usually does not accept all forms of debt. Debt settlement companies usually will not accept secured debt (mortgages, auto loans, etc.), student loans, or loans from federal credit unions.
- You may see substantial savings. While reputable debt settlement companies will never make guarantees, debt settlement sometimes achieves surprisingly good results. “Debt settlement, on average, saves consumers $2.64 for every $1 in fees paid,” according to a 2018 report called the Regan Report, which was commissioned by the American Fair Credit Counsel, a debt settlement industry trade group.
- Debt settlement companies, in most cases, handle nearly all of the negotiations tasks.
- Unlike bankruptcy, you do not have to liquidate (i.e., sell) your assets to pay your creditors. While it might be a good idea to do so to help get through your debt settlement program faster, you will not be required to do so as part of a debt settlement program.
- At least in the short term, your credit will be damaged by going through a debt settlement program. This stands to reason: Debt settlement is a very aggressive option that involves missed payments to creditors and less-than-full repayment of principal. Consider carefully whether you need or intend to apply for credit in the near future before entering a debt settlement program.
- While some customers may have success in debt settlement, there is no guarantee your specific creditors will be open to negotiating on or settling your debts. Debt settlement companies cannot force creditors or debt collectors to accept a settlement offer.
- Creditors and debt collectors are free to contact you during your debt settlement program (unlike bankruptcy—in which the “automatic stay” prohibits creditors from suing or contacting you after filing). Debt collectors, especially, can be aggressive.
- Creditors may sue you. Reputable debt settlement providers will often suggest their customers have a plan in place for dealing with potential creditor lawsuits.
- Debt settlement companies are usually for-profit entities that charge fees. The fee a debt settlement company charges after settling a given debt is usually around 18% to 25% of the principal amount of the debt at time of enrollment. These fees are in addition to whatever payments are owed to the creditor under the applicable settlement agreement.
- The amount of debt a creditor cancels may be considered “income” for income tax purposes. There is an exception to this rule, however, if the debtor can demonstrate insolvency.
Call us today at 844-LEGAL-16 (i.e., 844-534-2516) if you would like to learn more about the costs and benefits of Evergreen’s legal plan offerings.
Disclaimer: The information in this blog post is provided as general information only and should not be construed as legal or other professional advice. Evergreen Legal Protection is not a law firm. Never substitute information obtained from the internet or this blog for professional advice and guidance from a legal professional licensed in your jurisdiction.