In December 2007, revolving debt reached a record high of $940 billion and America spiraled down the worst economic disaster since the Great Depression of the 1920s. With debt increasing and the consumer unable to make minimum payments against borrowed, debt relief became the greatest essential and thousands of companies sprouted up offering effecting debt settlement to ensure that credit profiles do not show outstanding debt.
But what is debt settlement?
Debt settlement is basically when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. For example, if Alex owes Shaun $300 but finds that he is unable to pay it back, and then he can offer to pay a certain lump sum amount of the borrowed principal, say $200. If Shaun agrees then the outstanding debt is removed and credit is brought back to zero. This settlement between Alex and Shaun is a debt settlement. Generally, debt settlement works best when the consumer is able to offer a lump sum payment.
Debt settlement as a debt relief technique should not be confused with debt consolidation or debt management. In the latter two, the debtor is required to make monthly payments to a middleman, the middleman takes his cut and directs the balance to the creditors. Debt settlement companies work in different ways. The process begins with placing all payments in a savings account. With the growth of the amount, the debt settlement company negotiates with the creditors and finalizes a settlement amount. The settlement company pays the settled amount and charges a specific fee for its services.
So what is debt settlement’s thunderously roaring catch in the background?
Prima facie, everyone gets paid, debt gets erased and life goes one. However, the part of the process which requires the actual stoppage of payments is a nervous bit of quicksand.
Firstly, in order to facilitate settlement, you have to stop making payment to your accounts. Late payments are reported and filed with credit bureaus causing your credit score to fall. The hassle of receiving collection calls. Late payments also reflect upon credit reports for up to seven years. This makes it difficult to obtain fresh credit cards, loans or even a job or an attractive insurance policy. When the debt is settled, the bad debt in your account is never completely shed of the history of late payments. Settled debts are not free of taxes either. The Internal Revenue Service does not exempt settled debts and you are required to pay income tax on it.
Aside from these pitfalls, there are vicious scams that are perpetrated under the garb of debt settlements. Many debtors have approached companies who advise them to stop payments and collect cash from their accounts. After a few months, when the collection companies come a-calling, those companies cannot be contacted. People have lost a lot of money pursuing debt settlement, it is a precarious road to take.
In Utopia, debt settlement is a perfect solution but there cannot be a perfect solution. The standard law maxim of Caveat Emptor or ‘Buyer Beware’ is very much relevant to all aspects of debt settlement.
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