Debt Settlement Frequently Asked Questions
What Is Debt Settlement?
Debt Settlement (also referred to as debt negotiation) means that your debt is negotiated down to a reduced amount and paid off in a lump sum. In some rare cases, multiple payments are utilized to pay off the debt, settling the account in full.
Where Can I Find A Trusted Debt Settlement Firm?
With the huge rise in unemployment, unmanageable debt, economic problems, and uncertainty in the marketplace, many fly-by-night companies have sprouted up offering debt settlement to consumers that are not legitimate; in fact many are nothing more than scams. Some offer unrealistic settlement expectations or promise nearly impossible monthly payments and time horizons. A good debt settlement law firm will help you understand what your options are and is very realistic with you about what to expect. You can also check out the law firm reputation with the State Bar to know that you are hiring reputable attorneys.
Will Debt Settlement Affect My Credit Score?
If you are current on your payments, it is very difficult, if not impossible to settle your debt. Creditors typically want to see that you are in a hardship situation before they are willing to negotiate. Therefore, you will have to voluntarily stop paying your unsecured debts; allowing them go into delinquency before settlement. In addition, you cannot pick and choose which debts you wish to settle in most cases. Your creditors and/or collections agencies may review your credit report and most will be unwilling to negotiate when they see that they are being offered less than what is owed to them while others are being paid on time as agreed. Secured debts, such as a home loan or car loan are collateralized; you should continue to pay these accounts on-time to avoid repossession or foreclosure proceedings.
By not paying your creditors, your credit will be adversely affected by debt settlement. However, having to experience this circumstance may be better than having to file for bankruptcy, especially on your credit rating. During your debt settlement program, your total balances are being lowered over time as they are settled in full – a great start to financial recovery.
Can I Settle My Debts On My Own?
Of course! There is no legal requirement for you to have an attorney to settle debts. However, attorneys are trained and skilled at debt negotiation and settlement, and we usually get better results than you can on your own. If you have just a couple debts or less than $10,000 in debt, you could to try to talk to your creditors directly to settle the accounts yourself. There is a lot of information publicly available to assist with this, but word to the wise: If you owe over $10,000 in debt, have several accounts you need to settle, or need the structure and the guidance of a knowledgeable professional, you may be better off seeking out the assistance of a knowledgeable debt settlement firm.
Debt settlement is by no means an exact science. And it’s difficult for an individual lacking experience with creditors to determine whether a settlement is fair or not. In addition, you have to directly handle all creditor calls and the harassment that comes with the job. Many people are simply unable or uninterested in handling that kind of pressure, especially with the daily complexities of managing a job, household or family at the same time. Hiring a professional debt settlement law firm with a good reputation can no doubt save you more money, give you better advice, and get you out of debt in a much less stressful manner, enabling you to move on with your life.
How Will Debt Settlement Affect My Taxes?
In general, in the United States, the IRS considers debt which is forgiven as income. This means if you borrow $15,000 on your credit cards and settle it for $8,000, the $7,000 difference is taxable as income since it is not repaid. However, the IRS will often waive this tax liability if you can show that you were insolvent during the time in which your debt settlement took place. We highly recommend a quick call to your accountant or tax professional for further discussion.
Will you be making monthly payments to my creditors?
Debt settlement firms do not make your monthly payments to creditors for you. Rather, any payments made to creditors are a result of negotiated lump sum settlements or in rare cases, based on a pre-negotiated settlement payment plan. You are in control of your money at all times and you make the final payment once a settlement is reached.
Who is holding my money while I’m waiting on a settlement?
You do! Our law firm handles only the negotiation aspect of the case. This means that you keep your own money in your own bank account where it belongs. That way, you have your cash as your disposal in the event that you need it.
When can I expect my first settlement?
If you make your monthly payments on time and follow your program protocol correctly, you should experience your first settlement within 4-6 months. However, settlement isn’t an exact science. If you only carry a couple very large balances, then it may take longer depending on your creditors and your monthly payment. However, you should discuss your specific situation with a certified debt specialist.
Can you stop my creditors from calling me?
When you hire our law firm we will send a Cease and Desist letter requesting that your creditors call the law firm instead of you. This will stop the majority of creditor calls, though we cannot guarantee that all of your creditors will play byt the rules and call us instead of you.
Can I get sued?
Yes, this is a possibility based on the motives of each individual creditor but it is based on several factors and isn’t as cut-and-dry as one would assume. Our goal is to settle your debts as quickly as possible to minimize the likelihood of lawsuits. In the event that you get sued during the course of the debt settlement, you will discuss your options with our office. At that point, you may have us file an Answer to the lawsuit of file bankruptcy to stop it.
Will this have a negative effect on my credit report?
Yes, there will be an adverse effect on your credit report while in your debt settlement program. All debt settlement programs will have a negative impact on your credit report and you should be VERY cautious of any firm that tells you to the contrary.
Will all of my creditors and collectors agree to settle?
Most creditors and collectors are willing to negotiate to settle debts. However, no one can force creditors to accept a settlement. In the event that a creditor refuses to settle you can meet with our attorneys to discuss an alternative way to deal with the debt.
Is the amount I save on each of my settlements taxable?
When your creditor settles your debt, a savings of $600 or more off what you owed may be reported by your creditor to the IRS as Discharge of Indebtedness income. You may wish to consult your tax advisor to determine whether your individual circumstances may permit you to exclude any such Discharge of Indebtedness Income from your reportable income due to insolvency. For more information on tax ramifications to you personally you may also wish to consult a CPA or Tax Attorney and to refer to the IRS website www.irs.gov IRS Publication 908- “Bankruptcy Tax Guide” and IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness available on the IRS website.
Can a debt collector call the family or friends?
This right is limited as the creditors can only call to ask about the location of the debtor.
Can a debt collector call at any time of the day and night?
No, they can only call between 8am and 9pm, according to the Fair Debt Collections Practices Act.
Can a debt collector collect the debt which the debtor feels he actually does not owe?
Under the Fair Debt Collections Practices Act the debtor can ask for the certified copy of the debt, if he feels that there is a dispute. Debt verification is an important part of FDPCA.
Can a debt collector call and speak to the employer?
Yes he can, but there are limitations on this right. The collector can call the employer to inquire only about the location of the debtor, to inquire if there is any medical insurance to cover or to inquire about the wages. The debt collector should not reveal the reason for the call.