Have a big liability that’s legitimately yours but can’t or don’t want to repay it in full? You may be able to avoid covering some of what you owe – or even most – with a debt settlement. Or not. After all, the creditor – not you – decides on if it will give you a break. In general, it’s unlikely that you’ll be able to reduce the amount of a current credit card bill, but if you’ve already missed a few cycles or it’s been sold to a third-party collector, your chances of getting a break increase.
As a consumer, you have the right to ask any creditor if they’re willing to accept a smaller sum, with the contingency that they will not come after you for the difference. When settlements are properly arranged, you’ll have the pleasure of going to bed at night knowing that in the morning you’ll wake to no more demanding phone calls or letters.
However, doing it yourself requires extensive communication, bargaining, letter writing, and standing in line at the post office to send correspondence via certified mail. Once done you’ll have to follow up to make sure all is as it should be. It’s a rigorous and not particularly pleasant process. Worse, success is not guaranteed. Did you get the best possible deal? What happens if the creditor doesn’t honor the agreement and hunts you down for the remainder?
Because of these questions, working with a debt settlement company can be attractive. By doing so, you’ll put the case in their (hopefully) capable hands. All you have to do is wait to see what they come up with. And pay the price, of course. Here are six key points to know about debt settlement companies.
- Know how they function. The fact is, a debt settlement company can only do what you can do for free – but for a fee. Any company that claims social powers is not being truthful. If your bill is still with the original creditor (such as your credit card issuer or a department store) you’ll be asked to cease payments and send the money to them instead. If the debt is with a credit card issuer, late fees and interest will accumulate. The settlement company will keep the funds in a separate account until you’ve racked up enough for the company to offer a fraction of the balance as a lump-sum settlement. Some lawyers settle accounts, too, and if they don’t use this system, they’ll typically charge by the hour.
- Quality varies. Just as you wouldn’t dine at a restaurant that’s been cited with serious health code violations, you shouldn’t hire a debt settlement company with rotten reviews. Yet countless desperate debtors do no more research than choosing the first that pops up in an internet search, or call the one advertised on television. Do not do this! Some are definitely better than others, so check their rating on the Better Business Bureau’s website or type the company name then “review” in the online search bar. Read as many real-life accounts as possible, focusing on the latest updates, before deciding.
- Beware of lawsuits. It’s important to know that if you do stop paying your bills as instructed, the creditor may decide to take legal action against you. That you’ve hired a debt settlement company is irrelevant. They’re not getting paid and they want the money. So be on the look out for a summons to appear in court. If you are sued, you’ll probably lose the case and that could result in an even higher debt since the balance will be bloated with attorney and court costs. If you’re working, the judge may permit the creditor to collect with a wage garnishment.
- Figure out the fees. Federal law prohibits debt settlement companies from charging upfront fees – so if they ask for it, run fast. What they can do is charge you a percentage of either the total amount of the debt they’re handing or the amount they saved you with the settlement. Clearly the financially superior plan is to parter with a company that will take a cut of the savings. For example, 25 percent of a $5,000 debt is $1,250. But if the company got the creditor to settle for $2,000 and charged 25 percent of the savings ($3,000) the fee would be a far lower $750. Mind that fees vary by state law, and in some states they are capped at lower rates, such as 15 percent.
- Understand the credit reporting damages and advantages. If you’ve been making timely payments and then go delinquent, your credit rating will take a nosedive. But if the account is already behind, in default, or in collections, the impact of the settlement will be less severe. On the upside, a satisfied debt can help with credit utilization, because it will bring your overall debt down. Still, many creditors will notate the account as settled rather than paid in full. That doesn’t affect a credit score, but if a lender, landlord, or employer looks at your actual reports and sees the notation, they may form a poor opinion of you. It’s a clear indication that you did not fulfill the original obligation.
- And speaking of taxes…This is very important. If you are relieved of paying a portion of the debt with a settlement, it could trigger a taxable event. After the deal is complete, you might receive a tax form 1099C, or a “cancellation of debt.” That means you could be liable for taxes based the forgiven amount, which might represent a considerable tax obligation, especially if the creditor forgave a large amount.
So should you use a debt settlement company? That depends. If you have the opportunity and energy to arrange your own settlement, do it. If you’re a busy parent, work a couple of jobs, travel lot, or are just flummoxed with the entire process, hiring a company to do the work for you might be the way to go. It’s no more strange than hiring a professional to paint your house or prepare your taxes and it could save you hundreds or even thousands of dollars. But if you have the money to pay, either over time or all at once, you should.
I managed a large C & C agency for years and wondered why people pay at all. It does NOT help the score. It keeps the account alive for 7 more years. It takes money that you will need. Start saving! Pay cash or use debit. Never settle a debt. Keep the money in your pocket where it belongs Tip: Only people who need to get a car or home are virtually forced to payoff a collection account; otherwise NEVER DO IT!!!”
What doess C&C mean?
“Credit and Collection.”
I have Midland credit And portfolio services.. whatever they are called..and SYNCHRONY is on my credit report.. and I don’t have actual ACCOUNT w them. SYNCHRONY bought GE CAPITAL BANK CARDS, AND THESE ACCOUNTS ARE ALMOST AT 7 YEAR MARK GE AND SYNCHRONY WERE SUED END OF 2016 .. $225 MILLION.. I NEVER RECEIVED ANY NOTIFICATION OF ACCOUNTS BEING BOUGHT BY SYNCHRONY, SYNCHRONY HASN’T CONTACTED ME, AND I STOPPED GETTING EMAILS IN 2013. WELL DURING SAME TIME FRAME I BECAME ILL, AND IT EFFECTED MY BRAIN AND MEMORY. SO I WOULDN’T HAVE KNOWN IF I DIDN’T PULL CREDIT REPORTS. ALSO HSBC SOLD OUT TO CAPITOL ONE.. AGAIN RECEIVED NOTHING AS FAR AS NOTIFICATION.. MY HUSBAND’S ACCOUNTS A FEW OF THEM ARE ON MY CREDIT REPORTS. THEY ALSO HAVE ORIGINAL DATE OPENED AS IF THEY WERE JUST OPENED
ANY ADVICE? I HEARD MIDLAND AND PORTFOLIO ARE BRUTAL AND HAVE BEEN SUED.. SO IM ANXIOUS. DOESN’T CBR HAVE TO INFORM YOU IF TERMS OF CREDIT AGREEMENT CHANGES, AND THERE WSS MULTIPLE INACCURACIES ON MY EXPERIAN. AND THE CREDIT BUREAUS ARE RESPONSIBLE FOR MAKING SURE THE REPORTED INFO IS ACCURATE.. AND THEY CLEARLY DIDN’T.. I REQUESTED DEBT VALIDATION, AND THEY DIDN’T..
If you requested debt validation and they didn’t, it should be removed from your credit report
What if I am already in a debt settlement program, and want to get out of it? How do I go about doing that?
One way to deal with a creditor who sues you, is to make an offer in settlement. The creditor is likely to accept the settlement since it means they avoid the expenses of going to court and collecting the judgement. Federal and most state courts encourage settlements in order to reduce the number of trials. I’m not sure what the tax implications of making a settlement are, but I don’t think they are the same as if the creditor forgives the debt. I also understand that making a settlement has less impact on your credit score than having a judgement against you. Be sure to consult with an attorney before taking this approach so that you understand all the consequences.
Don’t pay tax on debt cancellation without exhausting every possibility on Form 982.
I got audited because I never got a form for cancelled debt several years ago. I was not a happy camper.
Call the IRS and ask about amending your return.
I need a company that can Settled Student Loans
Call your student loan servicer, where they are currently. I went with Elite Student Solutions and they wowed me with fact that I qualified for forbearance after 10 years because I work for a non-profit (health system). They charged me almost $500 up front and I would be paying a fee every month for this ‘Service’. I also found that they were doing the same thing the debt settlement companies do…collecting my payments and letting them pool, not paying anything to my loan servicer.
I called my original servicer because I noticed they were not getting paid. I locked my account so they did not have access to it and I am paying the original servicer my payment, which is much less, and without the service fees. I could have probably negotiated this on my own.
And I have to see if I can get any of the money back that I paid to Elite. I hope I can because it was a good chunk of change.
And mind you I have been paying on my school loans since 1997, went back for my master’s and I STILL owe over $45K >_<
I appreciate your insightful information on debt settlement companies. How long does closed accounts and debt settlement remain on credit reports? How long do unpaid doctor bills stay on credit reports?
Thanks for your kind words! We appreciate your readership. You can learn more about how long items like unpaid doctor bills stay on your credit report by reading this article.
Can you refer a debt company?
S&N debt solutions
They have terrible ratings online. Have things changed since i read this.
Check out National Debt Relief out of NYC.
I had national debt relief very bad… I dont recommend
You write in the article above about debt settlement companies, “Some are good and some that could best be described as the ‘rats.'” However, your article does not say which debt settlement companies are good and which are the “rats.” Where do you name the good companies and the “rats”?
John, you’re way off base on this one. Point by point, DS companies does charge fees for services; they’re entitled to them, but now the laws have changed about when they may actually take them. Accounts are typically opened in a secured way with a reputable financial institution, in which deposits are accrued until a reasonable negotiation can be reached. The account belongs to the debtor, not the DS company, and the account holder may withdraw the money at any time. Yes, credit scores will drop, due to non-payment, but by that time, the debtor most likely is in a financial mess anyway, though can at least look forward to an actual settlement in the future. When a DS company begins working with a creditor (CA), it’s generally in the best interests of the creditor to stop all legal attempts to collect a debt (judgment), for fear of losing everything. Finally, if a debtor receives a 1099-C after negotiating a debt settlement, there are exceptions to paying the tax on that event, most notably, insolvency. Details and forms are available on the IRS website.
I’ve had a USAA credit card years ago.They charged it off as bad debt and closed the account. They gave me a # to a collection agency, which turned out to be Heltzberg Jewelry. They are not a collection company, now USAA says I still have an open account with them. Is that legal???
Plus they are still reporting me to the credit bureau