Debt Settlement – Debt Relief
Everything you need to know about debt settlement – debt relief
Companies that claim to be debt settlement agents can negotiate, settle or change terms of debts. Dealing with debt settlement – debt relief firms can be risky.
On November 30, 2021, the Consumer Financial Protection Bureau (CFPB) Debt Collection Rule clarified certain provisions of Fair Debt Collection Practices Act.
- Find out more about the Debt Collection Rule.
Sometimes called “debt relief” and “debt adjustment”, these companies claim that they can negotiate with creditors to lower your owing amount. You have many options. There are some risks to consider before you agree to work with a credit settlement company.
Risks associated with debt settlement companies
- Many debt resolution companies charge high fees.
- Usually, companies that settle your debts will ask you to stop making further payments on your credit card bills. You’ll be charged late fees, penalties, and interest, plus other charges if you don’t pay your credit card bills on time. Creditors will also likely increase their collection efforts against the borrower.
- You might not be able to work with all your creditors.
- Usually the debt resolution company won’t be able to settle all your debts.
- A debt arrangement company might ask you to open a bank account that a third party manages. This account may come with fees that you pay.
- A creditor may file a lawsuit against you if you work with a debt resolution firm.
- If the debt resolution company doesn’t settle all or most of your outstanding debts, any savings it achieves with the debt settlement company may be lost.
- Debt resolution services can negatively impact your credit score and ability to obtain credit in the future.
Warning: Often, settlements can leave you in deeper debt than when you first started. Many companies that settle debts will ask that you stop paying your debts to get creditors to negotiate and collect the funds necessary for settlement.
Stopping payments could have a negative impact on your credit score. It may also result in the debt collector or creditor filing a lawsuit while you collect settlement funds. Late fees and interest will be added each month to your debt if you stop paying on your credit card.
Additional fees and charges could apply if you go over your credit limit, too. You may see your original debt increase.
Don’t do business with any company promising to pay off your debts if they do any of the following:
- Before it settles your debts, it charges you fees.
- A “new government program” is proposed to help people with credit card debt.
- They promise to reduce your debt by settling the entire amount.
- It can guarantee that your debt will disappear.
- They tell you to stop communicating with creditors.
- It’ll tell you that it can stop all debt collection and lawsuits.
- You can get a guarantee that your unsecured debts will be paid in pennies for each dollar owed.
Tip: Contact your state Attorney general or local consumer safety agency before doing business with any debt settlement firm. You can ask them if there are any consumer complaints against the company you are considering doing business with.
Some states require that debt settlement companies be licensed. Check with your state regulator to see if your state requires licensing for your debt settlement company. If so, ask your state Attorney General. For more information, you can visit the Federal Trade Commission’s page ” Coping with Debt”.
A non-profit consumer credit counseling service is an alternative to a debt resolution company. These non-profits will work with your creditors to create a debt management program that you can afford. This alternative can help you get out of debt. These non-profits can help you create a budget and/or provide financial counseling.
You might also want to consult a bankruptcy lawyer, who could be able to help you understand your rights under the law. Many bankruptcy attorneys are willing to speak with you at no cost.
Be aware that debt forgiveness can have tax implications.
The part of your debt forgiven by a creditor generally is considered taxable income for federal and state income taxes. To learn more about how forgiven debt impacts your federal income tax, you might want to consult a tax professional or tax attorney.