When confronted with the overwhelming burden of debt, it’s natural for people to seek relief from any source possible. Debt settlement, a strategy in which a third party negotiates with your creditors to reduce or eliminate your debt, often presents itself as an attractive option. However, like most financial strategies, it’s not without its pitfalls.
Here are some reasons why debt settlement might not be the best course of action for everyone:
- Persistent Collection Contacts: As you start to amass funds for your debt settlement, the relentless barrage of collection contacts, be it through calls, mail, or emails, won’t cease. Not only can these be stressful, but they are also often far from polite.
- Risk of Legal Action: If the amount you owe to a lender is significant, they might resort to suing you. Losing such a lawsuit could have severe implications, such as wage garnishments or the seizure of your assets.
- False Promises: The arena of debt settlement is riddled with false promises. The Federal Trade Commission warns against warning signs like upfront fees, claims about a “new government program” for credit card debt relief, or any form of guarantees. Remember, creditors, are under no obligation by law to accept your offer.
- Credit Score Impact: Debt settlement can have a devastating impact on your credit score. Furthermore, the settlement will remain visible on your credit report for seven years from the date of the initial delinquency. In comparison, Chapter 7 bankruptcy remains on the report for a decade.
- Tax Implications: Many people are unaware that the IRS views forgiven, canceled, or discharged debt as taxable income. After a debt settlement, you will receive a 1099-C form. Unless you qualify for a rare exclusion or exception, you’ll be liable to pay taxes on this “income” by April 15 of the subsequent year.
- Reluctance of Creditors: Not all creditors are willing to negotiate with debt settlement firms. This means you could end up with escalating debts, riddled with fees, pushing you to the brink of bankruptcy.
- Risk of Incomplete Programs: There’s a chance you might drop out of the debt settlement program before its completion, leaving you not only with your original debts but potentially larger ones.
- Closed Accounts: Settling debts often leads to the associated accounts being closed by creditors. This can limit your access to future credit and further damage your credit score.
While debt settlement can be a viable option for some, it is not a one-size-fits-all solution. Before diving into such a decision, it’s crucial to talk to an experienced Bankruptcy Attorney to understand the potential pitfalls and repercussions fully. Always consider seeking advice from a local attorney to ensure you’re making the best decision for your unique situation, in your state.