If you are a resident of South Carolina who facing financial difficulties, you might not want to opt for bankruptcy. There are other options available out there and you need to know what might work for your situation. You could find yourself entering into a debt settlement arrangement. Before you enter one of these arrangements, you need to fully understand the scope of these financial arrangements and learn how they work. Here at the David Aylor Law Offices we have a team of experienced South Carolina bankruptcy attorneys who help clients with their financial problems every day, and one of the things many clients ask us about is debt settlement arrangements. Let’s discuss debt settlement arrangements in detail, so you can decide if that would be the best option for you.
Explaining a Debt Settlement Arrangement in Detail
A debt settlement arrangement might also be referred to as credit settlement or as debt negotiation. Sometimes it is called debt arbitration. In an effort to catch up the debt and reduce the amount that is owed, the creditor and the debtor agree to a reduced dollar amount that is accepted to pay off the debt. During the repayment period, also referred to as the negotiation period, all payments are made directly to the debt settlement agency. The agency usually holds on to the payments for a while to ensure the payments are behind.
When all of the debtor’s accounts have become defaulted because of non-payment, the debt settlement agency has the needed leverage to convince the creditor to be willing to agree to a reduced lump sum payment as a settlement and to take care of the debt in full. While the defaulted debt sends the debtor’s credit rating spiraling, especially if the debtor wasn’t behind on payments until the commencement of the negotiations for a settlement, the reduced settlement does help get the debts paid off more quickly. You should be aware that when the debts are paid, your credit report will show the late payments or defaults for seven years. However, there are many debtors who would prefer this option over filing bankruptcy.
Sometimes people confuse debt settlement with debt management or debt consolidation, but those are very different. In debt consolidation or debt management programs, the debtor makes payments to the lender who consolidated the debt and then the rest of the funds are passed on to the creditors. That approach ensures the creditors are paid in full and the amount of the debt is not lowered. In debt settlement, the debtor continues to make monthly payments, but the settlement company deducts its fee for the legal work or negotiations.
Payments are then paid to the creditor after the fees have been deducted. The debt settlement company works to get the creditor to agree to take a settlement that is lower than the amount that is paid to them by the debtor so they can keep the difference. Unfortunately, many debtors don’t realize there is a difference in debt settlement and debt management, so they opt with debt settlement thinking they are going to end up with a clear credit report. Instead, they end up paying out just as much money as if they had paid the debts in full, but the debts aren’t being paid in full and the delinquencies are impacting their credit report and overall credit scores.
How Debt Settlement Works
A survey focusing on U.S. debt settlement companies revealed that only 34.4% of those enrolled in debt settlement programs had 75% or more of their debts settled within three years. Debtors can set up their own debt settlements with their creditors by using the advice that is found online, by hiring an attorney to act for them, or by enlisting the help of a debt settlement company. Some attorneys have said that when debt settlement is done correctly, it can definitely help those facing financial problems. The downfall is when payments are stopped to a creditor in order to negotiate a settlement.
The stopping payments can reduce a credit score anywhere from 65 to 125 points, and the credit of those whose payments were current until enrolling in the program can see even a more significant impact. Even after the debt has been settled and marked as paid, those late payments can appear on their credit report for as long as 7 years. Experts advise that you only deal with a debt settlement company that charges only after a settlement is made. That charge shouldn’t be any greater than 20% of the amount of the outstanding balance reduction. Some legal experts say that the debt settlement arrangement is flawed and should never be used. Whether it would work for you is dependent upon your overall situation.
Advantages to Debt Settlement
There are advantages to debt settlement programs. Settlement companies usually get a package deal with the creditor so only 35% to 50% of the original debt is paid. And, more often than not these settlements are reached much more quickly and effectively than a debtor would get when handling the process on his or her own. More creditors are willing to settle debts this way than end up writing them off or getting just small portions paid through Chapter 13 payments.
Disadvantages to Debt Settlement
There are disadvantages to debt settlement programs as well. Debt settlement companies usually take a percentage of your savings of the forgiven debt as their payment for services. While it does sometimes take several people and some time to reach an agreement, debt settlement programs have a considerably high drop-out rate if the plan lasts more than 36 months. If you deal with a good settlement company, they will make calls monthly to check in on you, set up a plan where you could miss a couple of payment because of emergencies, and set it up so the plan will be finished early if you make all payments on time.
If a credit card account is charged off, it is usually in collection 6 months after the last payment was made on the account. Your debt settlement company might not handle the calls from a creditor like an attorney’s office would, but the calls may slow down when the settlement company starts negotiating with the creditor. Remember, a good debt settlement company will work with you to stop the calls and prevent the harassment. You don’t want to be sued by your creditors because your settlement company is not making contact. This can be prevented if you work with a reputable debt settlement agency.
Debt Settlement Done on Your Own
If you are thinking that you can do debt settlement on your own, you actually can. You can imitate a professional’s debt settlement methods and effectively negotiate settlements on your accounts. You initiate the process by calling the billing or financial services divisions of credit card companies or other unsecured creditors. In general, they will only work with you if you are late making your monthly payments and have the ability to make a single large payment. You will not have the option of a payment plan when settling a debt. You will be required to make a payment of a lump sum for the amount agreed to as the settlement. As an advantage to settling your own debts, you won’t have to pay the fees that are charged by a debt settlement company. You can also keep control of the process doing it yourself.
Settling one debt might motivate you to work on your other accounts.
While you might have more control of the situation and save yourself some fees, there are some disadvantages to handling your own debt settlement arrangements. Many creditors have set procedures that they follow when it comes to setting up debt settlement arrangements. Many of those policies prohibit them from working directly with the consumer to settle a debt. Consumers might encounter settlement rates that are less advantageous than those available to debt settlement companies. Debt settlement companies usually have established relationships with the creditors and package several accounts together to get better deals. Each creditor has their own procedures regarding settlements, and not knowing each creditor’s processes can leave you in the dark and without a successful agreement for a reduced bill.
The Incentive for Debt Settlement
The primary incentive of the creditor is to recover funds that they might not ever receive if the debtor decides to opt for bankruptcy instead of the settlement agreement. The other incentive is that the creditor can often recover a higher dollar amount through a debt settlement agreement than he or she can through the regular collection process because collection efforts are expensive and time-consuming. The creditors also know those collection lawsuits and harassing calls also push the debtor into filing for bankruptcy, which results in them not recovering any funds at all.
The Negative Results of Debt Settlement
While debt settlement can save you money and help you avoid bankruptcy, it does not come without its negative effects. Credit reports might show evidence of late payments because of the default resulting in convincing the creditors to work with the debtors. FICO scores might be lowered as a result. However, getting a letter from the creditor indicating that the debt was paid in full will help boost the credit report and the credit report will then show no signs of settlement. Debtors usually see their credit scores start to improve as soon as debts are paid off.
If you have debts settled, you might face some tax liability. Debts that are partially canceled outside bankruptcy might have taxable consequences. The canceled portion of the debt will have to be reported at taxable income because the Internal Revenue Service considers forgiven debt at taxable income. You must be provided with 1099-C, a tax form, for forgiven debt amounts of $600 or more. You do not have to report debts that are forgiven if you are insolvent at the time the debt is forgiven. To be insolvent, your debts must be greater than your total asset amount.
Schedule a Case Evaluation
At the David Aylor Law Offices, we understand bankruptcy, debt settlement, and other financial issues can be challenging. We have a team of knowledgeable South Carolina bankruptcy attorneys who are ready to help you make the best choices for your financial situation. With our help and guidance, you can overcome the obstacles and regain control of your financial situation. When you ask us, “What is a debt settlement arrangement?” you can count on an answer that is straightforward, easy to understand, and with the details, you need to make an informed decision. We will take the time to go over your current financial situation with you and show you which options match your needs and how you can decide how to take care of your financial problems and reestablish yourself.
Call the David Aylor Law Offices right now at 843-310-4900. Our phone lines are manned 24/7 and we have experienced attorneys available to assist you around the clock. You don’t have to spend another sleepless night worrying about your finances. Now is the time to start taking control of your financial problems. We will work with you so you can come up with the best possible solution for your needs.