Anyone who has faced difficulties with their finances or finds they have debts they can’t repay understands the stress and complications of that situation. The wish to resolve those issues as quickly and as effectively as possible is a natural reaction to preserve one’s quality of life. There are several options for finding debt relief available to individuals and businesses alike. While each debt resolution method has its pros and cons, some are more effective than others. Overall, bankruptcy is the fastest, most cost-effective, and the only permanent way to finding debt relief. Behm Law Group, Ltd. can help you file a strong bankruptcy case for long-term relief and financial stability. In particular, we want those in debt to understand how programs for debt settlement in Mankato, MN and the surrounding areas work and why they might not be beneficial.
Debt Settlement Process
Debt relief/debt adjustment/debt settlement programs are third-party negotiators who supposedly work with your creditors to resolve a debt for a lower amount than what you actually owe. In such programs, you’re typically required to pay the settled amount in a lump sum payment right away. Other arrangements may provide for the monthly payment of lower amounts over a number of years.
The settlement party is paid with a flat fee or on a percentage of your overall debt that they resolve. They are also sometimes paid with a percentage of the settlement amount that you pay. This means that even though you’re receiving some form of debt relief, significant additional fees can be involved to pay the debt settlement company in addition to the creditors.
While the settlement is negotiated, you’ll start to make monthly payments to the third-party program. The settlement company will place those funds in an account. When a settlement is finalized, the creditor is paid a lump sum out of the account.
Problems With Debt Settlement Companies
The main problem with working through a third-party settlement program is the significant additional costs that are involved. The fees paid to the debt settlement company average from 15% to 35% of the original or negotiated debt. These fees are usually first paid in full before any work is done for you. This can add up quickly, and the amount of the settlement fees is always much higher than the cost of a bankruptcy attorney and bankruptcy court filing fees.
Another major issue is that settlement providers may require you to stop making payments to creditors while a debt is negotiated. This causes your credit standing to drop with each missed payment.
Settlement programs also take four to six years to resolve a debt negotiation (versus the three to four months of a liquidation bankruptcy case), and programs only handle specific debts. Bankruptcy addresses a much broader range of debts.
Another major problem is that you are taxed on any debts that are settled for you by the debt settlement company. For instance, if you owe Discover Card $10,000.00 and the debt settlement company settles the debt for $3,000.00, the $7,000.00 that is not paid is taxed against you as ordinary income.
Another significant negative is that a creditor with whom a debt settlement company settles a debt will sell the portion of the debt that was not paid to a third-party debt purchaser. Thus, the term “settlement” lavishly employed by debt settlement companies is a half-truth at best and an outright lie at worst. For instance, if you owe Discover Card $10,000.00 and the debt settlement company “settles” the debt for $3,000.00, Discover Card will sell the remaining $7,000.00 to a third-party debt purchaser for 10% to 20%. The third-party debt purchaser will then start collection activities against you for the remaining $7,000.00.