Debt Consolidation FAQs and Tips
How does a debt consolidation settlement service work?
A debt consolidation settlement service operates in two ways. First, they negotiate with your creditors to reduce the total balance owed on your debts by 40-60%. This means your creditors agree to be paid less than they are actually owed in order to settle the debt. Second, as part of the settlement, the creditors also reduce the interest rate on the remaining balance and the service sets up a payment schedule for the new balance.
Can any debt be settled?
A debt settlement service can only settle credit card debts, medical bills, and unsecured personal loans and lines of credit. They can't settle secured debts like home loans and auto loans. They're also unable to settle student loans, IRS debts, legal judgments, and government loans. If you need help reducing any debts in the latter categories, see a bankruptcy attorney for advice.
Can I settle my debts myself?
You can, but creditors are not required to negotiate with you. A debt settlement service is more experienced in the process and knows how to negotiate with creditors, which are most likely to deal, and which are most likely to sue you for an unpaid balance.
Will I owe taxes on my debt?
The IRS considers any forgiven balance taxable. So, if you pay $2000 on a $6000 debt, the $4000 difference would be taxable. However, the tax on $4000 is much lower than paying the whole debt.
Will my debt be consolidated?
Not in the traditional sense. Although a debt consolidation and settlement service will require a single monthly payment from you, you're not paying toward a consolidation loan or debt management plan. Instead they hold onto the funds until you have enough money to pay off the debt or disburse the funds as agreed with your creditors to pay off the remaining balance on settled debts.
Can I use a home loan to settle my debts?
If you're able to qualify for a home equity loan or cash-out refinance, the service can settle the debt and then use the funds from your home loan to pay off the remaining balance in 2-3 months.
Will debt settlement affect my credit profile?
Yes, creditors will note the debt settlement on your accounts, however the damage resulting from the settlement is much less than if you defaulted on your debts or filed for bankruptcy. Over time, the weight of the settlement is reduced. Your credit will recover after a few years if you use credit wisely in the future.
Can I still use credit cards while making debt settlement payments?
The settled debts will be
closed, so you'll be unable to access those accounts. The services recommend that you don't continue to use credit while making payments because you'll probably find yourself in debt again after the program ends. Instead, learn to budget your money and spend wisely while in the program so you can continue living debt-free after the program.
Will I have to sell my house or car?
If you're not delinquent on those loans and can afford to pay them, then debt settlement won't affect your property.
Can I settle debts no matter where I live?
Some states prohibit debt settlement by its residents. Contact a debt settlement service to find out whether or not you're eligible.
Should I settle my debt?
Only you can answer this question. In general, you should avoid debt settlement if there's any way you can pay your debts as agreed. It may take years, but paying them off is better for your credit. If you can't pay them off and are facing bankruptcy, then debt settlement may be a better option for your unsecured and credit card debts.