What Are the Risks of Debt Settlement?

What Are the Risks of Debt Settlement?

 When individuals find themselves in deep financial trouble, it is easy to feel overwhelmed and turn to the most available option that promises a solution. While it’s tempting to opt for debt settlement, it’s also incredibly important for people to carefully weigh their options and the potential consequences before making a decision. Debt settlement may seem like a promising and easy way to fix financial problems, but in reality there are many risks that accompany this type of action—risks that can haunt a person well past their debt being settled.

The Dubious Nature of the Game

Many debt settlement companies know desperate times call for desperate measures, and that’s the basis of this industry. Because of that, companies can be dishonest and often try to scam individuals who find themselves in tough situations. They lure people into their programs by making promises that—because of the immense gamble of debt settlement—are seldom kept. Despite how they advertise their services as a way to drastically minimize debt or even make it disappear entirely in a short amount of time, these companies rarely give extensive information about the drastic consequences their methods can have on a person’s financial future. This has landed many debt settlement companies in trouble with the attorney general, the FTC, and other governing bodies. In dramatic irony, some of the owners of debt settlement companies have found themselves in the position of having to hire a criminal attorney to solve their own legal and financial problems.

Agreements To Settle for Less:

Another thing to keep in mind is that when negotiating with collection agencies to accept “less” than what is owed to the original creditor, you are not talking to to the original debtor. Why is this important? Well, for two reasons. First, the collection agency might be contracted to collect the debt on behalf of the debtor, but not have full authority to accept less than the original amount. What happens when you make your payment for less? It’s possible you may not be released from the balance. Second, the collection agency might opt to “sell” the remaining amount they did not collect from you to another tiered collector down the line. This is a dirty tactic, but they are legally able to do this if you have not documented the settlement correctly. It’s advised to get any offers in writing, and have them reviewed by an attorney before making any payments. What type of communication is legal and binding? Typically a letter sent via US mail stating the terms will do. In the advent of modern communications, other forms are now considered binding as well. Be aware of this, because even text messages have been shown to be binding, even in real estate contacts. Bottom line? Get your attorney’s advice.

Knowledge Is Power

It’s important to understand how debt settlement works to see the flaws in the method. Essentially, when you apply for assistance at a debt settlement company, that company becomes the middleman between you and your creditors. These companies encourage you to stop paying your bills, because consistent lack of payment suggests financial struggle. Meanwhile, you will be making payments to the settlement company directly and they handle the negotiations with the creditor using the amount of money you’ve given them. Theoretically, this could all play out just fine, but in actuality the majority of cases are never settled and those that are rarely save as much money as individuals are originally promised.

Creating Problems for Your Financial Future

This process is also extremely flawed in its very foundation, because while stopping payments to creditors may push them to settle your account, it does horrible things for your credit score and financial opportunity moving forward. It may become incredibly difficult to get approved for good loans, housing, and other credit opportunities in the future, which can drastically limit how you utilize your money and send you into even more debt down the line.

Not only does debt settlement hurt your credit score, but individuals can also lose a good chunk of money with the fee they pay the debt settlement company for services. Sometimes, the amount owed to the company may not be specifically known until—or if—the settlement process is complete because, although it can be a flat fee, it is often a percentage of the total debt. Additionally, you will likely still owe income tax on the amount of debt settled, so in the long run you won’t be saving as much money as you originally presumed.

While debt settlement can seem like an enticing option for a quick fix to make your financial problems diminish, it’s really important to remember that when you put your faith—and money—into unreliable hands, there’s a good chance you’ll end up worse off than you started.



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