Debt Settlement Can Be A Blessing Or A Curse

An unfortunate outcome of the current economic downturn is the growing number of people facing debts they can’t pay. This has spawned a wave of advertising from companies who claim they can negotiate debt settlements for pennies on the dollar and help you avoid bankruptcy. Of course, it comes with a fee for their services. What the ads don’t disclose are the negative consequences of entering into debt settlement agreements. Your credit will be affected, but not as severely as it would be if you are forced to file bankruptcy. Think of it as the lesser of two evils.

If you are buried in debt and thinking of contacting one of the debt settlement companies, the first thing you should do is analyze how you got in financial trouble. If you got there by simply overspending until you exhausted your ability to borrow, you are not going to be a good candidate for debt settlement unless you can change the way you live. Debt settlement is for people who want to pay their bills, but have experienced unexpected hardships that have negatively impacted their ability to pay.

These are people who, prior to some unfortunate situation such as an accident, illness, job loss, divorce or other unforeseen event, were in good standing with their creditors. They want to get back to that position. They are people who are unable, not unwilling, to meet their financial obligations. Unfortunately, debt settlement is a largely unregulated industry that has attracted some unscrupulous players who prey on vulnerable individuals. It does little good to sign on with a debt settlement company if undisclosed fees and charges end up costing you more than they save.

With consumer debt approaching $3 trillion, coupled with a sagging economy, the number of people in trouble is growing exponentially. The failure of our educational system to teach basic financial literacy leaves millions of people facing financial hardship with little or no knowledge of how to overcome the problem. Unfortunately, these are frequently people who fall into the lower to middle income bracket and have few assets to draw against when faced with unexpected financial adversity. It is this combination of circumstances that make them vulnerable to unscrupulous practices.

For those experiencing severe financial hardship, debt settlement can provide a better alternative than debt consolidation loans, bankruptcy, or trying to hide from creditors. For people willing to make the needed sacrifices, legitimate debt settlement companies provide the financial advice and advocacy needed to negotiate plans to reconcile debt, improve income to debt ratios and help you gain control over the process of getting out of debt.

If you are facing mounting debts and are considering calling a debt settlement company, here are some things to consider:

1. You must be committed to reducing your spending so you can save money to fund a settlement agreement.
2. You must understand that the results of a debt settlement can’t be guaranteed.
3. You should never allow a debt settlement company to escrow your money on the pretense that they will pay your bills.
4. You should know that the IRS classifies any amount of settled debt in excess of $600 as taxable income.
5. Your creditors, especially if they are lending institutions, may exercise their right of offset and seize any deposits you have with them to apply to your debt.
6. Creditors may continue to call you even after you have entered into a debt settlement agreement.
7. A debt settlement agreement will probably have a negative impact on your credit score and credit bureaus may still report “Settled for less than full amount” even after paying settlements in full.
8. You should always make sure the debt settlement company is working solely for you and not any third parties, and is fully disclosing all fees and charges up front.
9. Before even considering a debt settlement company, you should review your finances and determine if you can afford to fund a program based on your expected income and expenses.
10. Finally, if you feel you are a candidate for debt settlement, be sure the company you chose has written policies and procedures about their debt settlement program, are members of the Better Business Bureau, have a customer dispute resolution and review policy and in-house legal counsel that has experience with credit industry compliance.

Here’s a tip! If you follow these guidelines, you may be able to resolve your credit problems and get yourself back in good graces with your creditors and start improving your credit rating. Once you are back on your feet, let the experience be a lesson and start planning for the next unexpected financial setback which will surly come. It won’t hurt nearly as much if you are prepared.

Original text from article for Asheville Citizen-Times, 45th week of 2008