Is debt settlement too good to be true?
If you’re drowning in debt, the many tools to become debt free may seem confusing and debt settlement enticing. Here’s everything you need to know about using debt settlement to become debt free.
What is debt settlement?
Debt settlement or debt relief is a means of paying a lender, usually with the offer of a large, lump-sum payment, up to 50% less than what you owe them. A third party, either a debt settlement company or an attorney typically negotiates the terms of your reduced balanced due on your behalf.
Everything debt settlement with Howard Dvorkin of Debt.com on Queer Money®:
What you should know about debt settlement
Debt settlements can eliminate between 10% to 50% of what you owe a lender. You can try to negotiate your own debt settlements, but experience matters in these situations. This is why people hire a debt settlement company or an attorney.
A third-party debt settlement company reaches out to your lenders on your behalf and acts as an intermediary to negotiate debt settlement terms. If you try to settle your debt on your own, it may be easier to plead your case with your lender if you’re not more than six months late on payments. If your payments are more than six months overdue, it’s likely that your outstanding debt has been sent to collections.
Collections agencies have zero incentive in negotiating a debt settlement because they’re paid on a percentage of debt they recover from you.Debt settlement is … repaying your debt for less than what you would if you honored the terms of your original debt. - Howard Dvorkin of Debt.comClick To Tweet
Whether you try to negotiate a debt settlement on your own or use a professional, being willing and able to offer a lender or collections agency a large, lump-sum payment is a contingency for debt settlements. A debt settlement company may require you to put this large, lump-sum payment into an account you control but that’s administered by another third party. As straightforward as it sounds, debt settlement isn’t without its challenges.
Debt settlement scams
Unfortunately, there are lots of people and businesses willing to use your financial desperation for their financial gain. Such scams could put you further into debt, lose your money and lower your credit score. Therefore, it’s important to make sure you understand everything there is to know about debt settlements before you pursue one.
This article and the Queer Money® podcast episode above are good starts. Then, before entering into an agreement with a debt settlement company, vet them through the Consumer Financial Protection Bureau, Better Business Bureau, your state attorney general and local consumer protection agencies. Be sure the debt settlement company or attorney has no history of complaints or news that raises red flags.
Lenders and debt collectors aren’t required to consider debt settlements
While debt settlement is a method for reducing and paying off debt, some lenders and debt collection agencies refuse to negotiate debt settlements. They are under no obligation to do so. So, depending on who you owe money to, debt settlement may not even be an option.
What do debt settlements cost?
Hiring a debt settlement company can cost you between 15% and 25% of either the amount the debt settlement professional saves you or the amount you owe your lender, the latter of which should be avoided if possible. Hang up on or walk away from any debt settlement company or attorney that offers any guarantees or wants to charge you for their services in advance of scoring you a debt settlement. That’s illegal.
Debt settlement professionals can’t charge you a fee until they’ve negotiated a settlement agreement for you, you’ve agreed to the terms and conditions of that agreement and you’ve made at least one payment to your lender or the collections agency. In addition to the 15% to 25% fee, you may be required to pay setup and initiation fees and monthly maintenance fees. A debt settlement attorney may bill you by the hour or a flat fee per creditor and collections agency.
Depending on how your attorney calculates fees, it may be less expensive to file for bankruptcy. Finally, because of the costs of debt settlements, they’re typically only appropriate for those in the more egregious situations with a minimum of at least four loans to negotiate.
What are the effects of debt settlement credit scores?
Many debt settlement companies suggest that borrowers stop making payments on their debt. For one, this acts as an indication of the financial hardship the total balance due puts on the borrower. If a lender or collections agency has reason to believe you are capable of paying the full amount due, they’ll refuse any negotiations. This stop in payment also helps borrowers save for the large, lump-sum payment. The larger your lump sum payment, the easier your negotiations.
While this is a legitimate strategy to negotiate debt settlements, it can further reduce your credit score that may already be quite low. It’s important here to note that even if you do take the debt settlement company’s advice to stop payments to your lenders, there’s no guarantee you’ll score a debt settlement. This could put you at more risk.
Finally, debt settlements are reported to the three credit rating agencies, Experian, Trans Union and Equifax, and could be on your credit report for up to seven years. This means that every time a bank or lender considers a loan for you, they’ll see that one time that you didn’t pay back all your debt. Debt settlements will also take your credit score lower than it already is, sometimes as low as 500 or within the “poor” range. This will make it harder to get future loans, apply for and get housing or a job.Those savings from debt settlement come at a cost. You sacrifice your credit. - Howard Dvorkin of Debt.comClick To Tweet
What are the tax consequences of debt settlements?
It’s likely that any settled or forgiven debt may be considered by the federal government – IRS – as income. That income is taxable and needs to be filed by the lender or collections agency on a 1099-C if you’re forgiven for more than $600 of your debt. This will reduce the “savings” of your debt settlement.
If you’re considered insolvent, meaning your total liabilities exceed your total assets, you may not have to pay income taxes on your settled or forgiven debt. To find out how a debt settlement would affect you and how to appropriately report it to the IRS, consult a tax professional.
This tax consultation, too, may add to the costs of your debt settlement.
Pros and cons of debt settlement
Finding any relief in paying off debt is exciting. To be fair, there are pros and cons of every option you have. Below are the pros and cons of pursuing a debt settlement.
The pros of debt settlements
- Lower your debt by as much as 50%
- Could make you debt free within 36 months
- Avoid bankruptcy
- Lenders and collections agencies will stop calling, emailing and mailing you
- Eliminates the risk of being sued
The cons of debt settlements
- Usually only options for unsecured, revolving debt like credit cards and not home, auto or student loans
- It could take you years to save the amount of money you need for your large, lump-sum payment
- Negotiating successful debt settlements could take up to 2 to 4 years
- Stopping payments could accrue late fees, penalties and additional interest charges
- It could ruin your credit
- Lenders may send collections agencies your way
- Lenders could sue you, which could result in wage garnishment
- Your settled amount may be considered taxable income by the IRS
- Debt settlements are neither free nor cheap
- You may pay fees on all of your debt, not just the debt that’s settled or forgiven
Should you pursue debt settlement or file for bankruptcy?
If everything goes correctly, debt settlement is often more beneficial for all parties than filing bankruptcy. With debt settlement, you reduce your debt and financial stress; the lender gets at least some money back and the debt settlement company earns an honest buck. While bankruptcy does provide protections to some of your assets and can be a faster process than debt settlement, it does mean you’ll need to liquidate non-exempt assets, such as your car and home, that you may feel you need. Bankruptcies, too, are also a matter of public record and can affect your employment prospects. Debt settlement’s a matter between two to three parties.
What you should do before pursuing a debt settlement
If you’re going to pursue a debt settlement, you’ll want to do it right to make it as easy on yourself as possible. Below are the primary steps you should take.
- Consider all your options for becoming debt free, including the Credit Card Pay Off Plan
- Connect with any lenders to share your predicament and ask for lenience
- Consider all your options for debt settlement companies
- Research the history and qualifications of any debt settlement company you consider
- Start saving money for your large, lump-sum payment to your lenders
- Don’t stop payments on your debt until a debt settlement company tells you otherwise
- Improve your credit score with Improve or Build Your Credit Score Powered by Experian Boost
How can you avoid needing a debt settlement?
There are many steps people can take to help avoid debt settlement.
The first is to avoid acquiring debt altogether. That’s harder to do today than ever but not impossible. Another option is to limit yourself to only using “smart” debt and, even then, limit the amount of smart debt you use. Loans, such as mortgages and student loans, are considered smart debt. Using these with limitations will help you avoid the need to file for debt settlement. If you can’t go it alone but aren’t quite ready to pursue debt settlement, your best bet is to hop on the phone and call your lenders and ask for lenience, as it’s in everyone’s best interest if you pay all your debts in full.
For your mortgage and auto loans, credit card and medical debt and other types of loans, call your loan servicers to find out what options are available. With mortgages and auto loans, refinancing may be an option. With each, forbearance in which you postpone payments for a period of time or a modified repayment plan with smaller payments over a longer period of time may be options.
Another popular method to avoid debt settlement is to pay off all your credit cards and other revolving debt each and every month. Having a budget to help spend less money than you earn helps. This is why we recommend our Budget Buster Bundle.
If your debt is out of control but you’re not quite sure if you should pursue debt settlement, there are other solutions. For example, our Credit Card Pay Off Plan, which uses our Debt Lasso Method, can help you pay off all your credit card debt for as little as $97. Below are a few more options.
1. The Credit Card Pay Off Plan
The Credit Card Pay Off Plan, which includes the Debt Lasso Method, Spending Analysis, Spending Reduction, the Dynamic Budget and more to pay off your debt fast and take your financial life from stressful to enjoyable, is for everyone. We mean, we put everything we learned while paying off our debt, from the Debt Lasso to budgeting to improving our credit scores all in this single, easy-to-follow plan.
If you’re a lone rider and want to go it solo . . . great! Go it alone. If you want the Credit Card Pay Off Plan and to join the group who’s paid off over $400,000 in credit card debt in the last two years . . . wonderful! Join the weekly credit card pay off coaching call (a.k.a. by our members, money therapy).
If you want the Credit Card Pay Off Plan, the group support and one-on-one coaching with us, personally, we’d personally love it. Click here to sign up today.
Hear what we told Good Morning America about the Debt Lasso Method:
See what people say about the Credit Card Pay Off Plan
Because of the Credit Card Pay Off Plan, we’ve now paid off $21,000 in debt since February 2019. – Nathan E
I’ve paid off over $14,000 in credit card debt with the help of the Credit Card Pay Off Plan even while paying for my wedding to my husband and our honeymoon. – Fred N
The Debt Free Guys’ Credit Card Pay Off Plan helped me realize my financial self-care is as important as other self-care for myself and our community. – Michael C
Because of the Debt Free Guys, my husband and I started our personal finance journey. With all the tips they provide, we eliminated our credit card debt in less than a year. – Claudia P
It’s easy to keep swiping the card without paying attention to the consequences. With the Debt Free Guys, we found the help we truly needed to get us back on track. – Brandon & Alex B
Shout out to the Debt Free Guys who are saving me $150/month in interest [with their Debt Lasso Method]. I look forward to being out of consumer debt much faster . . . total savings will be about $2,250. – M Morris
The Debt Free Guys bring a different financial perspective regarding the LGBTQ community that other financial advisors don’t. They have made me seriously think about my finances and how I spend my money. – Joe P
We’ve paid off $9,000 in credit card debt since starting the Credit Card Pay Off Plan earlier this year. – Karen & Dave D
I’m paying off $578 in credit card debt a month because of the Credit Card Pay Off Plan. – Jeanette
2. Debt Free Guys’ Queer Money 1:1 Coaching
Yes, we offer one-on-one money coaching. We can guide you step-by-step through the Debt Lasso Method if you’re looking to pay off your credit card debt fast, save yourself money and improve your credit score.
We also offer general personal finance coaching if credit card debt isn’t your sole thing or your thing, at all. And, if you don’t know what your thing is, we’ll help you figure that out and create a plan to reach it. Click here to schedule a free 15-minute consultation with us.
3. Rebuilding your credit score after a debt settlement
Even before but definitely after debt settlement, you’ll want to repair your credit report and raise your credit score as quickly as you can. This, too, isn’t easy, but it’s not impossible. There are steps you can take and tools you can use to help you which, over time, will get you back on track faster than if you do nothing at all. That’s where we can help you!
Which of these mistakes are you making with your credit score?
Look, there are many options to help you pay off your debt fast. All options aren’t for everyone, but no one’s lost. Neither are you. There’s an option. This article and Queer Money® podcast should give you enough information on debt settlement.
Resources for debt settlement:
- Credit Card Pay Off Plan
- The Debt Lasso Method
- Power Up: Taking Charge of Your Financial Destiny by Howard S. Dvorkin
- Credit Hell: How to Dig Out of Debt by Howard S. Dvorkin
- Debt Free Guys on Facebook
- Debt Free Guys on Twitter
- Queer Money Facebook Group
- Queer Money on Instagram
- Subscribe on iTunes
- Email [email protected]
For more help with debt, click these links: