Fernandina-Beach, Florida Debt Settlement Program
A debt settlement plan refers to creditors accepting a lower amount than owed as a payoff. Once accepted, creditors cannot keep reaching out to you for additional money, and you do not have to stress over getting sued for that specific debt.
Although this sounds like a great deal, there are some risks as well, and they should only be used as the last option before bankruptcy. Debt settlement can harm your credit in the short term, and it can be time-consuming for a settlement deal to be made, among other downsides that will be covered later.
However, if you are unable to make your payments, chances are debt settlement could help in the long term, as it often helps rebuild credit over time too.
Why choose Debt Settlement Over Bankruptcy?
Also referred to as debt adjustment or debt relief, debt settlement is simply a method consumers use to get out of debt without having to file for bankruptcy, which severely harms your credit score and stays with you forever.
Debt settlement shows on your credit history up to 7 years, then removed and not visible past this period. Whereas bankruptcy lasts up to 10 years before no longer impacting your credit score but continues to be visible on a credit report forever. That means future creditors, employers, etc. will always be asking you to explain the bankruptcy. This also creates a negative first impression that could impact your approval for credit cards, loans, or even getting a job or home.
Another reason to try debt settlement first is the creditor will still receive some type of payment. It may be up to 60% less than owed, but once they agree to a deal, they are guaranteed to get something paid back. If they decline and you end up filing for bankruptcy, they may not receive any further payment on the debt owed.
The Process Debt Settlement Companies Use
Debt settlement is only a way out once you have several late payments or possibly accounts in the collection because you were unable to repay. If these creditors and/or collectors have reason to think you can repay, they won’t accept a lower amount than owed. Although, being contacted by a debt settlement company can make all the difference.
When you are to the point of feeling hopeless, your credit scores have been trashed, and you can no longer maintain debt, then contacting a debt settlement company makes sense.
The debt settlement agency you go with will negotiate a lower payoff amount with creditors to lower what you owe. This is usually on unsecured debt, such as loans or credit cards. It is not going to help with late mortgages on a house that could be foreclosed on or a car that may be repossessed. Additionally, a company usually will not settle federal student loan debt.
The debt settlement company will only be helpful if creditors have good reason to believe you would be unable to repay them anything. For example, if you are at the point of considering individual bankruptcy.
Another option would be to stop making payments. You can, instead, open a savings account and deposit what you can each month. Once the debt settlement company believes you have enough to offer a lump-sum offer, they can help be the middleman to get you a lower payoff amount. Again, this will harm your credit score.
What Are The Advantages of Debt Settlement Programs?
There are several advantages to going with a debt settlement program, especially over the bankruptcy option. The biggest is that with a debt settlement company, you are more likely to get the attention of creditors and get a lower payoff amount.
Reduced Time To Repay Debt
Most of the time, a debt settlement plan will have a 2-to-3-year repayment period with lower monthly payments than you currently have. This is because they negotiate, on average, 40% to 60% of your original amount due. The shorter the repayment period you accept, the higher the monthly amount will be, but the less you pay to the debt settlement company as interest overall.
Using Credit Cards After Debt Settlement
The continued use of credit cards after you apply for debt settlement is not recommended, but it is possible that you’re allowed to. If you owe a ton of debt, the debt settlement plan may restrict your use of credit cards, but if it doesn’t, then you should be able to leave them open.
It is highly recommended, if credit cards are left open, to use them only for emergencies and not for casual purchases. After all, you are getting help because you’re unable to afford the debt, right?
Fewer Payments Equals Less Stress
If you are like most applying for debt settlement, you probably have several different creditors that you owe. Instead of stressing over making 3, 4, or 10 bills on time each month, consolidating them into a single payment will greatly reduce your stress level. It will be much easier to remember the due day and how much your bill is.
Lower Interest, More To Save
In addition to a single payment, it is likely you will have a drastically lower payment to make each month. This further reduces stress and gives you a little extra each month to build a nest egg or cover the small things you couldn’t before. Self-care is an important aspect of keeping yourself mentally and physically healthy and on track financially and with rebuilding your credit.
Knowing The Negative Aspects Of Debt Settlement Plans
While debt settlement companies may be able to reduce debt by half and help you get out of the financial hardship within just 3 years, it does come with some risks.
Success Is Not A Guarantee
Some companies will advertise that they have assisted over 640,000 clients settling more than $9 billion since 2002. When applying for debt settlement and paying the application fee, there is no guarantee that they will be able to negotiate a much lower rate with all or any of the creditors you owe. So be aware that some creditors may not negotiate.
According to a statistical study by the Center for Responsible Lending, many consumers would only benefit when settling four or more accounts. Additionally, the total debt could increase fees over time, and creditors may continue using aggressive collection methods while the debt settlement agency is negotiating.
Look Out For Hidden Costs
As with any type of business, some of them will try to hide fees from you until it’s too late and you’ve already accepted the terms. Always do your research and see if anyone else has left negative feedback regarding sneaking fees in they were unaware of.
It is normal for debt settlement companies to charge a small upfront fee for the application process. However, there is no guarantee that creditors will accept a lower payoff amount regardless of how well the debt settlement agency negotiates with them.
Some of these hidden fees can come in the form of additional fees, such as monthly maintenance fees, setup fees, etc.
Paying More Over Time
Keep in mind that the lower the monthly amount is, the longer the repayment period will likely be. The longer this period, the more interest you will be paying long-term. This could end up costing more than you originally owed if you accept an excessively long repayment period.
Settled Debt, Taxable Income
It is important to realize that the Internal Revenue Service (IRS) usually considers the forgiven debt amount to be income. Because of this, the settled amount is likely to be taxed, requiring you to pay the amount to the IRS.
If you owe a massive amount of debt, you may consider contacting a tax professional to find out the tax obligations you would face by settling the debt.
What’s The Debt Settlement Services Cost?
When debt is settled, you will have a fee to pay. However, fees cannot be charged upfront except for the application, so most debt settlement agencies will charge a percentage of your eliminated debt based on the amount at enrollment.
As an example, say your debt is $20,000, and the company can negotiate a settlement for $12,000. The company’s fee is 10%.
- If the debt settlement agency charges a percentage of the settled debt, you would pay $12,000 to the creditor and be charged $2,000 (10% of the balance at enrollment). Total repayment, $14,000.
- If the settlement agency charges a percentage of debt eliminated, you would pay the $12,000 to the creditor and be charged $800 (10% of the $8,000 debt that was eliminated). Total repayment, $12,800.
Things To Consider When Applying For Debt Settlement In Fernandina-Beach, Florida
If you still feel that applying for debt settlement is your best option, there are a few things to consider before choosing the debt settlement company in Fernandina-Beach, Florida.
Always look the company up on the Better Business Bureau (BBB) or with your state’s Attorney General to find official complaints against them.
Avoid choosing a company that guarantees debt to be settled or charges an excessive upfront fee.
Be aware that non-profit does not mean they offer discounted or free services and that these often include those hidden fees mentioned earlier.
Do not select a debt settlement company that offers to challenge debts so they are declared “invalid.” This method is more often going to backfire and cause more aggressive actions to be taken against you.
Ask what services are included, and ensure fees are a percentage of the eliminated debt instead of the total debt owed when enrolling. This helps provide motivation to get you the lowest debt possible.
