Over the years, we have heard from dozens of people who have used the services of a debt settlement agency. At the present time, there are hundreds of such agencies operating in this country, and they generally advertise that they will make offers to your creditors and will get the creditors to accept approximately 50% of the balance owing on a loan or a charge card by offering each creditor a lump sum payment and expecting the creditor to write off the remaining balance. According to a recent article in the Pittsburgh Post-Gazette, several of these agencies have recently been fined by the Consumer Financial Protection Bureau because they were charging people upfront fees for their services. According to laws enacted approximately two years ago, these agencies can only charge a fee if they are successful in negotiating a low amount with a creditor. At that point, they can charge a fee, but they cannot charge any fees until they have actually made a settlement with a creditor.
We have noticed there are numerous problems with these settlement agencies. Here are just a few of them:
- The settlement agency will have you pay a certain amount each month and they will deduct that directly from your bank account. They will hold the amount each month and will not do anything further until they have enough money to make an offer to a creditor.
- Since you are not making any more payments directly to your creditors, the creditors will begin collection proceedings such as telephone calls, letters, negative information on the credit report and even lawsuits. Since the creditors have not agreed to sit around and wait until there is enough month being held to make an offer to them, there is no way the agency will stop the creditor from doing anything further to collect or to sue in the meantime. You may have ten different creditors and it may take years for the agency to have enough money to make payments to all of these creditors. In the meantime your credit just continues to get worse and the harassment and lawsuits continue.
- If the agency is successful in negotiating the lesser amount to be paid to the creditor, it still will be a negative on the credit report. It will state on the credit report that creditor was paid by settlement and accepted a lesser amount your credit will still be negative.
- If a creditor accepts a lesser amount, the creditor is required to then issue a 1099 form to the IRS and you will be required to pay taxes to the Internal Revenue Service on the amount that the creditor agreed to cancel or waive. This can add several thousand dollars to your tax bill and also would negate future tax refunds.
If you are considering engaging the services of a debt settlement agency, why not give us a call at 800-360-9392 to discuss all of your options? In many cases it might be a better option to file a Chapter 7 or Chapter 13 bankruptcy. Either of these options can save you significant amounts of time and money and years of bad credit. Also. the debt that is discharged through a bankruptcy proceedings is not taxable and therefore nothing would be owed to the Internal Revenue Service for the discharged debts.