Most individuals who find themselves in financial difficulty feel that bankruptcy is their last option. Unfortunately, this misconception often leads individuals to be preyed upon by the pseudo-legal debt settlement industry believing it to be an “alternative to bankruptcy”. These services, which may seem like the better choice, in truth, leave individuals believing that the creditors are stopped from collecting and that they are on the path to recovery. Nothing is further from the truth. The reality is this: in comparison to most debt settlement services, bankruptcy is almost always the best long-term option.
How the Debt Settlement Process Works and the Most Likely Outcome
For the most part, there are three ways to approach debt settlement: hiring a debt settlement agency, retaining a debt settlement attorney, or attempting to settle the debt yourself. With all three options, the goals are the same: a combination of 1) lowering the interest rate associated with a debt; 2) renegotiating the terms of a debt to lower the minimum monthly payments; or 3) arranging for a lump sum payment that is lower than the original balance in order to satisfy the debt.
The cost associated with different debt settlement options vary. By law, a debt settlement agency cannot charge upfront fees and therefore charges either a percentage of your total debt or a percentage of the debt eliminated by the settlement. The downside to this is that you may be liable for fees charged regardless of whether the debt was settled or not. For example, say an individual owes $20,000 in debt. If the settlement agency charges 15% of the total debt, the individual would be liable to pay the agency $3,000 regardless of whether the debt was settled. On the other hand, a debt settlement attorney may require an up-front retainer and bill by the hour for work performed over the retainer amount. Depending on an attorney’s hourly rate, opting for a settlement attorney may in some instances be costlier than any other option. Further, there’s no guarantee that the attorney will be able to settle the debt. Although the cheapest option is the “Do-It-Yourself” approach, anyone with experience knows the arduous and time-consuming process associated in dealing with creditors, which, for anyone already having difficulty balancing work, their finances, and their personal life, may be more costly in the long run.
The Process & the Most Likely Outcome
Regardless of the approach, the process begins in the same manner: the individual stops making payments to creditors. If one opts for the settlement agency approach, the individual would pay a debt settlement agency instead of paying creditors, and the agency would then deposit the money into an account on behalf of the individual. Once the agency believes there is enough for a lump-sum offer which may be considered by any particular creditor, the agency tries to negotiate the debt on the individual’s behalf. A settlement attorney will also advise the individual to stop making payments to creditors while the settlement negotiations are pending; but unlike a settlement agency, a settlement attorney may only agree to the retention if the individual has settlement funds available and ready to proceed with the settlement process.
The Harsh Reality of Debt Settlement
Unfortunately, an individual is often sold on the idea that debt settlement is the “safest alternative” to resolve one’s debts while also maintaining an individual’s credit rating. Here is the harsh reality:
- The debt settlement process can take months or even years
- Accounts must be at least three to four months’ delinquent for creditors to even begin the settlement process
- Accounts that go unpaid during a settlement process, will continue to get reported negatively to the credit agencies
- Accounts that go unpaid during a settlement process typically get sent to collection agencies, then to court, and ultimately end in a judgment against the individual
- There is never a guarantee that a creditor will settle, and if the creditor refuses to settle, an individual will now be that much further behind with payments
- Here’s a big one…if a creditor does agree to take less than the amount owed, the individual may have to pay taxes on the forgiven debt
Before being led down a path with false hopes, know the truth about all your debt settlement options. The law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP helps clients every day find the best choice for their specific situations. Call for a free consultation and let our experienced attorneys guide you to the right path.