Debt settlement is the process of you, or an agency, negotiating with your creditors to lower the debt in exchange for a single lump sum payment. Like any other debt relief option, debt settlement has its benefits and drawbacks. However, some myths about debt settlement can create an incorrect picture of what it is and how it works. To address this, here are common debt settlement myths busted.

Common Misconceptions About Debt Settlement

Debt settlement is a quick way to get out of debt

Debt settlement is not a quick way to get out of debt. It’s a gradual process where the agency. If you hire one, they will tell you to stop making payments to your creditor because only after some missed payments can they negotiate with the creditor for settlement. Typically, the entire process takes from 6 to 8 months. Sometimes, it can take even longer.

Remember that you have to deposit money in a private account every month to be able to pay the settled amount to the creditor. If you need more time to manage the lump-sum payment, the process will also take longer.

Debt settlement doesn’t affect your credit score

Usually, debt settlement negatively affects your credit score because one of the first steps is to stop making payments to the creditors. This directly lowers your credit score. The intensity of the impact depends on various factors, like your credit history, the status of the credit, and the number of accounts you want to settle.

For instance, if you have one credit card to settle, you will miss about 6 payments initially to start the settlement negotiations. If you have 3 credit cards to settle, you will be missing a total of 18 payments in 6 months, which will have more impact than 6 missed payments.

Moreover, when a debt is settled, it’s marked as “paid – settled”, instead of “paid in full”, which is not as favorable. However, it’s still considered better than leaving a debt unpaid.

The negative impact of debt settlement stays forever on your credit report

Most items don’t stay forever on your credit report, including settled debts and their negative impact. Usually, the impact stays for 7 years. Here’s how your credit score may be impacted during and after the settlement process:

• You miss about 6 months of payments: Credit score lowers every month for 6 months.
• The account is charged off after 6 months (usually): This significantly lowers your credit score at once, but after that, it doesn’t cause more drops.
• Debt settlement negotiated and debt marked as “paid-settled”: not much impact on the credit score, but future lenders can see the information that you settled your debt.
• You keep making all of your other payments on time: This keeps your credit score from nose diving.
• After seven years, late payments and the settled marking are removed: Your credit score improves, given that you kept making other payments on time and kept your credit utilization rate low.

Every creditor will be willing to negotiate a debt settlement

No, creditors are not always willing to negotiate debt settlement with you or your hired agency, as they have no obligation to settle the debt. Some creditors have strict rules and may even reject settlements, such as the IRS, state authorities, mortgage and auto lenders, credit unions, private clinics, etc.

However, many creditors do consider your offer if the balance is unpaid for long. Creditors who are likely to allow debt settlement negotiations can be credit card issuers, third-party collection agencies, unsecured personal loan companies, online fintech lenders, medical billing companies, etc.

Any type of debt can be settled

No, you can’t settle any type of debt. Usually, unsecured debts can be settled. They can be:

• Credit card debt
• Medical bills
• Personal loans
• Private student loans
• Business debts
• Repossession deficiencies

Debts that are usually not allowed to settle include:

• Federal student loans
• Mortgages or home equity loans
• Child support and alimony
• Court-ordered judgements
• Tax liens

Debt settlement is not legal

Debt settlement is legal in the US and most countries. You or a hired agency negotiates with the creditor to settle for a reduced amount rather than the full amount in exchange of a lump sum amount. In the US, debt settlement is regulated by the FTC’s Bureau of Consumer Protection and state laws so that debt settlement companies don’t use illegal methods against creditors or consumers.

Debt settlement is free or cheap

Debt settlement is neither free nor cheap. For starters, all or most debt settlement companies Queens are for-profit, so they charge fees, and the process is not free. Moreover, the entire cost of debt settlement is far from cheap.

Usually, debt settlement services charge 15% to 20% of the enrolled debt. On top of that, there can be administrative fees, monthly service fee, special account fees, etc. Moreover, you also have to pay tax on the settled amount of more than $600.

All debt settlement agencies are scammers

A debt settlement company can be legit or uses risky methods or be outright fraudulent. So, not all debt settlement agencies are scammers, however, you should pick a service carefully to avoid scammers and fraudsters. Common red flags that a debt settlement company is dodgy are below. You should report the company to the FTC:

• Claims it can make unsecured debt disappear for cheap
• Pushes for upfront payments and/or hides fee details
• Guarantees results. For example, guarantees to wipe out 50% of your debt
• Doesn’t explain its services, fees, or company details clearly
• Pressurizes you to stop communicating with the creditor
• Doesn’t provide you with written information

The forgiven amount is tax-free

The forgiven or settled amount is tax-free only if it’s less than $600. If it’s more than that threshold, taxes apply.

Debt settlement negotiations protect you from the creditor’s lawsuits

No, creditors can file a lawsuit against you even during debt settlement talks and you have to respond to it unless there is a separate agreement that stops them from it. This is why you should never completely stop communications with the creditor during debt settlement so you can promptly respond to any legal notices. Moreover, it’s not suggested to avoid any response to lawsuits assuming that the eventual settlement will fix this because debt settlement negotiations could fail.

The same is true for collection calls. Settlement negotiations don’t stop a creditor from pursuing you to recover the unpaid amount.

Debt settlement and debt relief are the same

Debt relief is a broader term that includes many methods of getting out of debt, while debt settlement is one type of debt relief.

Debt settlement works every time

Debt settlement negotiations may or may not be successful. It depends on the type of debt, the creditor, your credit history, the techniques of the debt settlement company, and other factors. Remember that if debt settlement fails, you may end up with more money to pay than before because you missed payments that led to late fees, penalty interest, collection fees, etc.

Conclusion

Understanding what debt settlement is and being aware of the common misconceptions can keep you from making any regretful decisions. So, this guide will be of help. If you’re considering debt settlement or have any questions, consult reputable debt reduction services Brooklyn.