Being in debt can be seriously embarrassing. An average person, who has borrowed money and now unable to repay it – who also doesn’t understand the intricacies of the spiraling debt structure very clearly – feels trapped and beholden to someone, who can exert control over their lives. Because money is owed to them.
Not all who are indebted are an average person, though. Enterprises – both large and small – take out loans to expand their operation. If everything goes well, they pay off the debt in time, along with the interest. But if the business goes bust, resulting in bankruptcy, repaying the loan becomes challenging for them.
Enters debt relief programs
Debt relief programs, aka debt settlement programs are private entities claiming to erase all debt problems, forever.
What they actually do is negotiate with the lender on behalf of the borrower. They play the role of a middleman. If the negotiation is successful, creditors allow borrowers to pay a fraction of the original debt. By paying this “settlement” amount, they can resolve the debt.
Impact on credit report
What kind of impact does debt settlement order (DRO) make on the credit score? As per the law, DRO will stay on credit report for the next six years from the order issue date. Six years is quite a long time and taking out further loan in the interim would be nearly impossible.
Advantages and disadvantages
Debt settlement is not a permanent solution to all your financial problems. It has pros and cons and you need to weigh them in, in order to decide whether debt relief would indeed be comforting for you or cause you distress in the future.
The biggest advantage of debt relief is paying less than what you owe to the lender. On the flipside, however, late payment charges will add to the original debt and the cumulative amount may surpass the actual debt, meaning the gap between the lump-sum amount paid by you to settle the debt and the original debt might be very small.
And if you default on multiple loans, taken out from multiple lenders, total debt settlement fee will be huge.
The ugliest part of debt settlement is tax consequences. The IRS has specific clauses that regulate the income generating from the absolvement of the original debt. Understanding all these clauses is difficult unless you have a degree in law. And don’t even think of hiring an IRS tax attorney as that will open a whole new can of worms. The attorney might add a false spin to your case thinking you want to settle your tax debt with IRS.
Tips for selecting program
I suppose you have received the message by now – that debt settlement is not a financial elixir; the way it is portrayed by some. And in some cases, it can do more harm than good. If you still think you need services of a debt relief program, go ahead, but with the below-listed tips to filter out the ones, not worthy enough for being hired:
- Find a reputed company: This is elementary but I have to repeat it every now and then as Einstein once said human stupidity is infinite. The relief program you are going to hire must be a highly reputed one. Here’s a guide on how to spot a good debt relief program.
Alternatively, you can check with the Better Business Bureau (BBB). They are a trusted organization offering consumers every detail on the credibility of a business organization.
The debt settlement company may conceal some crucial information, such as a complaint has recently been filed against them. But BBB will be candid enough to let you know everything. That said, not being registered with BBB doesn’t necessarily imply the service is a scam.
- Debt relief programs don’t offer their services for free. They will charge a fee. As a consumer you must see to it the fees are reasonable. Those who pay to hire debt relief programs are struggling with mounting debt. The last thing they want is to pay an unreasonably high amount of fee.
The fee structure is either a linear rate or a certain percentage of the debt. Decide which one will suit you best and hire an agency accordingly.
One important thing to check is whether the company has any refund policy. If they are confident they could get you out of the sticky situation you are in, they won’t be afraid to wager the money that you’ve promised to pay them. A promise of refund from a debt settlement agency doesn’t mean much for the debtor. But it reveals the agency’s intention and competence.
When you follow these tips, selection process becomes all too easy.
Debt relief agencies get mixed responses from their customers. Those benefiting from debt negotiation don’t hesitate to heap praises on and certify these programs. But those on the other end of the spectrum don’t speak highly of them.
It’s impossible for us to know which category you are going to fall into, but we can assure you if glean all the takeaways from this article, you’ll be better off when dealing with a debt settlement company.