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If you are in debt and can’t pay your bills, is a debt settlement program the cheapest way to get rid of debt? You can come to this conclusion from the American Fair Credit Policy Council (AFCC), an industry association of debt companies that has agreed to a strict code of conduct.
The main findings of the 2020 report include that debt settlement provided an average of $ 2.64. US savings of consumers for each accrued commission of $ 1.00. US, and that almost all of the proposed calculations, more than 98%, led to a reduction in customer arrears in excess of related fees.
How Much Do Debt Settlement Companies Charge
“Debt settlement can save consumers money by allowing them to pay off their debts for less than the full balance sheet,” said Jerry Detweiler, co-author of the e-book.
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He added: “This may be a way out of the debt for some people who cannot afford to repay the full amount of the debt.”
Debt repayment, also known as “debt relief” or “debt adjustment,” is the process of repaying an offensive debt for an amount much less than the amount you owe by giving the lender a significant lump sum. Depending on the situation, debt repayment offers can range from 10% to 50% of your debt. The lender must then decide which offer, if any, to accept.
Consumers can repay their debts or hire a debt settlement company to do it for them. In the latter case, you pay the company a commission calculated as a percentage of your registered debt. Registered debt is the amount of debt you have when you join the program. By law, a company cannot charge this commission until it has repaid your debt. The commission averages 20-25%.
Debt repayment can also incur tax costs. The Internal Revenue Service (IRS) considers debt forgiveness to be taxable income. However, if you can show the IRS that you are insolvent, you will not have to pay tax on your outstanding debt. The IRS will consider you insolvent if your total liabilities exceed your total assets. It is best to consult a certified accountant to determine if you qualify for insolvency status.
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According to AFCC data collected by Freedom Debt Relief, one of the most well-known debts in the country, debt settlement is the cheapest option compared to credit counseling or making minimum monthly payments, as shown in the infographic below.
Ironically, consumers who signed up for a debt settlement program because they could not manage the debt burden but still made payments, even occasional ones, were less able to negotiate than those who did not have any payments. Therefore, their first step should be a complete cessation of payments. “Credit scores may suffer during the debt settlement process, especially in the beginning,” said Sean Fox, co-president of Freedom Debt Relief. “As consumers begin to pay on fixed debt, credit ratings usually improve over time.”
Offensive debt and debt repayment for less than you owe can seriously affect your credit rating – probably by the mid-500s, which is considered bad. The higher your score before you fall behind, the greater the reduction. Overdue payments can remain in your credit report for up to seven years.
Withdrawal of payments also means accrual of fees for late payments and interest, which increases your balance and makes it difficult to repay the debt if you can not pay. Consumers can expect phone calls about debt collection when they become abusive. Creditors may also choose to sue consumers for debts of more than $ 5,000 – in other words, debts are worth their problems – which can lead to earnings. “The more money you have to repay, the faster you will be able to repay the debt. The longer your debt remains unpaid, the greater the risk of suing, ”says Detweiler.
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There is no guarantee that after receiving this damage, the creditor will agree to a settlement or agree to repay the debt for such a low amount as you expected. For example, Chase will not work with debt settlement companies. work directly with consumers or with non-profit licensed credit counseling agencies that help consumers. The Financial Protection Office (CFPB) warns that accrued penalties and unsecured debt fees can cancel any savings that a debt settlement company achieves for you, especially if it does not repay all or most of your debts.
When the process works properly, debt settlement can benefit everyone involved. Consumers are freed from debt and saved money, debt settlement companies earn money for valuable services, and creditors get more than they get if the consumer stopped paying at all or went to Section 7. Bankruptcy Chapter 7 bankruptcy concerns the liquidation of a debtor’s default. release of assets and use of proceeds to repay creditors. Exempt assets vary by state, but often include home and personal property, part of real estate, retirement accounts, and a vehicle.
Compared to debt repayment, Detweiler says, “if the consumer is entitled to bankruptcy under Section 7, this may be a faster option. This is a legal process that can prevent collection and litigation. Debt repayment does not provide such guarantees. ” However, he adds, “there may be many reasons why section 7 may not be the best option. The user may have to give up the property, which, in his opinion, should be preserved. Or they may not want their financial problems to be public. ” Consumers may also see restrictions on their employment if they file for bankruptcy, as some professions value employees’ credit histories.
Another problem that many debt consumers face is the inability to afford a bankruptcy lawyer. “Many consumers can’t claim bankruptcy protection,” Fox said. “On the contrary, debt repayment is available to any consumer who may be experiencing financial difficulties, such as staff reductions, reduced working hours, medical expenses, family deaths, divorces, etc., and who is trying to make progress in debt repayment.”
Bankruptcy under Section 7 can end in three to six months, compared to years to repay the debt. This can be less stressful and can allow your credit rating to recover faster, although bankruptcy will remain in your credit report for 10 years.
Make sure you can afford to repay the debts. Many debt settlement programs may require you to deposit a fixed amount of money into a special savings account each month for 36 months or more. Before signing up for the program, make sure that you can afford to set the required amounts for the entire duration of the debt repayment program.
Making minimum monthly payments on high-interest debt is not a good option for consumers who want to save money. This can take years – even decades – depending on how much debt you have and the interest rate. Daily interest is accrued on your entire balance, and with minimal payments, you make little progress by paying your balance monthly.
Constantly making minimum monthly payments and exceeding tons of interest can make your lenders very profitable, and, yes, a reliable payment history has a good effect on your credit rating. However, we do not recommend spending more than you have on interest to increase your credit rating. A good credit rating will not pay for your pension; there will be money in the bank.
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In addition, if the amount of available credit you have used is high relative to your credit line, it will affect your credit rating and potentially nullify the impact of your regular, timely payments. The AFCC report states that “the average customer reduced their total debt at the time of settlement from approximately $ 30,000 to $ 35,000 by approximately $ 9,500 after deducting commissions.
Consumers who make only the minimum monthly payment for high-interest credit card debt may pay more than the maximum.
Credit counseling is a free service provided by non-profit and government agencies. Interestingly, these services are often partially funded by credit card companies. By enrolling in a debt management plan with a credit counseling agency, you can get a reduction in the interest rate on the balance sheet and an exemption from penalties.
These concessions may be sufficient or insufficient to help you repay your debt much faster, and you may or may not be able to afford new monthly payments. In addition, you can not claim a lower interest rate, even if you have significant financial difficulties.
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However, because you do not have to default on your debt, your credit rating may suffer less. Credit counseling can also offer additional financial assistance to help you avoid similar problems in the future, such as budgeting and financial advice, as well as referrals to low-cost services and support programs to help you reduce your costs.
So how do you know which one to choose if you don’t want to fight bankruptcy? It is usually best to use credit counseling before entering into a contract with a debt settlement company. Credit counselors can help you determine the best course of action that debt management can provide, but in a way that benefits you, not necessarily a debt settlement company that is more interested in you as a client than in your credit business. .
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