While the below debt settlement Q&A is substantial and a must read before considering debt negotiation, enrolling in a credit counseling program, consolidating debt, or whether to try to avoid bankruptcy, it is by no means exhaustive. There are links at the end of some of the answers that will provide greater and often necessary details. Click the additional links to explore more in depth information about debt settlement.
You are also encouraged to ask any questions you may have by taking advantage of the “ASK Michael” feature of this site. The ask a question feature allows you to post a question and get a dedicated answer from an experienced debt settlement expert! You can also participate in the comment section below the post. To get direct answers to your debt settlement questions for free, call me at 800-939-8357, and choose option 2.
How does debt settlement work?
Debt settlement is what happens when you reduce the amount of your unsecured debts through direct creditor negotiations. At its core, debt settlement is the best option for a creditor to “lose the least” on accounts that default in payment. The process can be made to be largely predictable due to established timelines and bank policies which can and do vary from creditor to creditor.
Debt settlement is a proven effective means to eliminate debt for the right person. For a more detailed explanation of what debt settlement is and why it works read: Debt Settlement – Why Banks Do It – How It Works.
Debt settlement is often referred to as a debt resolution and debt negotiation. There are places online where you may see settling debt referred to as a form of debt consolidation, but it is nothing like consolidating credit card debt (using the most common definition of taking out a lower interest loan to pay off all of your higher interest credit cards). Debt settlement means debts are not being paid in order to later reach an agreement to pay less than the balance owed.
Debt settlement works best when you are fully informed about how each specific debt relief option will work given your unique set of circumstances. This means you compared all of your alternatives and reached a decision that made sense for you.
I find that negotiating debts will often fail to deliver the needed results when you are not involved in the process to some degree. In other words, if you need to hire a professional to help you, be sure you are in the loop throughout the resolution of each account.
Two cautions about negotiating debts.
- Do not rely on representations made to you rather than backing up your understanding by completing your own research about debt negotiation.
- Do not blindly engage in working with a debt settlement company, or try settling on your own, without first comparing ALL other debt relief options available to you (bankruptcy for example can often be the quicker and the least costly debt relief option).
How long does settling accounts take?
Debt settlements are reached and documented in as little as a single phone call. The time the whole process takes can depend on how behind in payments you are; the creditors and debt collectors you are dealing with; what kind of money you have set aside to fund any negotiated offers; and what your financial goals are.
That is the short answer.
What is rarely discussed by people and companies selling debt settlement services is how long should a settlement program be allowed to go before you should eliminate the notion it will get you where you need to be. The answer to this is not short and will vary for each person considering debt settlement.
Companies have been offering debt settlement programs to the public promoting time frames that are easier to sell, but more of a crap shoot to complete. In our experience the longer your debt settlement programs takes, the more it becomes a gamble. If you need a few years to complete a settlement program, you will often find you should not even start down the settlement path and seriously consider bankruptcy instead.
If rapid completion sounds impossible to you, you may be right. Then again, you just may not know what you need to about the process of debt settlement. You may have talked with one or more people who have misrepresented the whole thing. You may have read some poorly crafted information online. You may have gotten bias input.
Also consider, it is often the high fees charged by most professionals offering their assistance that leads to longer program lengths.
For a better understanding of how settling credit card debt quickly is in the best interest of your wallet, and your peace of mind, read how will debt settlement work for me?
You will want to know the settlement percentages available to you on each of your accounts. That information is difficult to publish because your savings target will be different with each creditor, and will change based on how far behind in payments you are, if a debt collector has the account, and timing factors that change because of details unique to you. If you are serious about settling debt, read through the entire CRN debt settlement guide and then call us at 800-939-8357 and choose ext. 2 to speak with a CRN professional. This way you can get a firm grip on the dollars and timing involved. We offer to consult with you for free.
How will debt settlement affect my credit score (FICO)?
Yes, debt settlement does damage your credit report, and will hurt your credit score. Credit counseling and bankruptcy impair your credit report, credit rating and access to new credit products too. All outside debt relief intervention options will impact you in one form or another.
More often than not, being in debt, especially overwhelming credit card debt, your credit accounts already have, or are about to negatively affect you. Depending on how long you have been delinquent in payments, negotiating and settling credit card debts for good can have an overall positive influence on your credit score. Access to new credit products can be easier obtained when you don’t have delinquent and outstanding debts. Settled accounts and/or zero balances are seen as “positive” when compared to unresolved debts.
Your major concern should be dealing with the debt first! Credit scores can recover. You can learn more about how the different debt relief options affect your credit without the spin by reading: Debt Relief vs. Credit Report
It is always recommended to plan ahead for your credit needs. Fears about what debt settlement, counseling or bankruptcy will do your credit score and reports are often misplaced. There are many web sites and personal finance writers who prey on peoples tendency to focus on their credit score more than the debt that is no longer affordable.
Can I negotiate my credit card debt myself?
Yes! Debt settlement isn’t rocket science. It’s just that there is a formula to follow to optimize your results. Most people are skeptical when they first hear about do-it-yourself or DIY credit card debt settlement. There is no shortage of sales people out there who reinforce the idea that only a pro should handle your settlements. They only get paid, after all, if you hire them. Most of the people “selling” debt settlement could not settle their way out of a wet paper bag. They enroll you – get their commission – then hand you off to a back end service provider.
When you understand how the whole debt collection and settlement process works, coupled with up to the moment policies with each of your creditors, it becomes simplistic and straight forward to negotiate your own settlement deals. You also save a ton in fees!
Do you really want a pro to do the settlements for you? That’s fine. We do that too, or we will connect you with experienced negotiators and attorneys who only charge for settlements when they are completed. The fees through CRN for professional debt negotiation are 15% of the savings achieved, after the work is complete. This fee is about half or less the cost of hiring the typical debt settlement company. The only catch is that you will have a couple hours of your time invested in some reading. Not a bad deal in order to save what for many will be thousands of dollars. Heck, your reading about settling debt right now anyway….
At Consumer Recovery, we believe everyone should be given the opportunity to know what the pros know and then make up their mind. Many of our members have appreciated that. You will too! Get more details on getting expert debt help.
Will I still be able to use my credit cards when settling debt?
You will not be able to continue to use credit card accounts that you intend to settle with. Debt settlement typically requires you to have missed payments. More often than not, this means missing enough payments that cause your credit card use privileges to be cut off. This is standard.
There are additional elements that you need to be aware of when it comes to using your credit cards.
How you used your credit cards leading up to your inability to keep up with minimum payments can have an affect on the settlements that are available with your original creditor, or an assignee debt collector your creditor may hire. For more detail on this topic check out this must read: Which accounts belong in your debt settlement program.
If you keep accounts out of your debt settlement plan, the available credit limits may get reduced to what you currently owe. This is because creditors will run your credit report as part of normal account review policies. If you fall behind with other creditors in order to settle those accounts, this will show up on your credit report. Creditors you are current in paying, or with whom you may not be carrying a balance, can see the late payments to others and use that fact when deciding to lower your credit limits. Is this a big deal? Not really. Read the above link on which accounts to keep in or out of a debt settlement program for CRITICAL details about this angle too.
How much does debt settlement cost?
Over the years many settlement firms have come up with varying methods for charging fees. One thing that has not varied much is – the fees are too high! Because the vast majority of companies charge excessively high fees, people researching debt settlement and the companies that offer the service, may think high fees are just part of the program. But there are affordable services available.
The Federal Trade commission published new rules in 2010 that ban any up-front fee for direct debt settlement services. There are limited exceptions to the rule. Anyone exploiting the exceptions by charging fees in advance for professional debt negotiation services are best avoided. Generally, fees are now charged based on success only (when a deal is reached and at least partially paid), which means companies have to wait to get paid as they complete settlements on each account.
Even with the new FTC rules that affect when debt settlement companies get paid, it did not impact how much they can charge. Some states have put laws in place to cap fees. Illinois for example capped fees at 15% of savings. Coincidentally that is what CRN has charged since 2006. At the time of the rule changes, we predicted that companies would still charge 25% of the balances of the debts enrolled in the program, or when charging on a performance basis, set fees at 25 to 30 percent of savings. We were right.
Debt settlement fees.
The fees you pay to a debt settlement service provider will directly relate to how long it will take you to successfully settle your debts.
I strongly encourage you to only engage a company offering settlement services whose fees are based on success. Look for firms who do not charge high fees. CRN offers education and ongoing support to help you settle your own debt, and if you want a pro to handle it – we offer that to, but you only pay 15% of savings – which is half or less the cost of working with most debt settlement companies. There are a couple companies out there who charge fair fees like us.
Be extra careful of how you might get referred to a debt settlement company. Often times, the person referring you to a company has captured your attention through some form of online, television, or radio advertising. They may have credibility and are able to gain your trust. What you may not know is that they have a financial incentive for referring you. This is pretty standard. There are many forms of cross-affiliation in the debt relief industry. You may be sent over to a debt settlement company based on who pays the referrer the most.
For some serious reading on this topic, read Dude Meets Debt Wall and also 5 Things You Won’t Hear from a Debt Settlement Company
Will I still get debt collection calls?
Debt collection calls are simply part of the process. This article includes options you can use to reduce unwanted collection calls to a minimum without causing a bad reaction from your creditors.
WARNING: Many companies send out letters to your creditors instructing them to cease communication with you. This can be a harmful business practice! It is important that you allow for some contact with creditors and even debt collectors. If they cannot contact you they are often left with the most aggressive tactic for collection, the courts.
Collection calls, for some, will seem to be the most burdensome part of the process. The goal of the collector is to get any type of payment from you that they can. Debt collection agencies, and the collectors who work for them, have proven all to willing to cross the line when collecting. Read about what you should watch out for and recognize as abuse.
Should debt collection harassment occur, you can get help from a consumer attorney familiar with taking the collection industry to task on violations of state and federal laws that exist to protect you. One legitimate and immediate way to stop collection calls is by hiring an attorney to represent you in bankruptcy. Calls do stop if you go this route.
Are there tax consequences to settling debt?
If you have a debt that is settled for less than the original balance, and the difference (the forgiven portion of the debt) is greater than $600.00, the creditor is supposed to send you a 1099c, which would then be reported as income. But not everyone will owe tax on their settlements.
The IRS does allow you to write off any income from forgiven debts up to the amount by which you were insolvent at that time. Unless you had a positive net worth at the time that you settled an account, which for many is unlikely when buried in debt, you generally wouldn’t have to pay any taxes on the forgiven debt(s). Always consult a tax attorney or tax adviser for options that can be applied to your specific circumstances.
Incidentally, if you do wind up owing taxes, it is because you saved money. So, keep that in perspective. In the same way that you would budget and set aside funds to settle with, if you are solvent and owe tax on forgiven debt, you must also budget to pay the taxes.
You can read about this concern in much greater detail in the critical debt settlement report we published – Tax on cancelled debt.
For more detail, please visit:
What types of debt can be settled?
Most any type of unsecured debt can be settled. For example:
- Credit card debt
- Business and/or commercial debt
- Slow or late payments
- Charge offs
- Accounts placed with a debt collection agency and/or attorney debt collectors
- Medical bills
- Deficiency balances
- Store credit card
- Pre judgment and post judgment settlements
There are some important reasons to leave certain accounts out of your debt settlement plan. These can include accounts with small balances or those with recent balance transfers. If you have several accounts to contend with, make sure you read, What Accounts to Include in Your Debt Settlement Plan.
Can my wages be garnished if I’m in a debt settlement program?
Debt Collectors can be intimidating and may use questionable tactics that are designed to scare people into making a payment, even if you cannot afford to make one. Actual garnishment actions are not that common and you will have advance warning. Creditors must first file and serve you with a lawsuit, get a judgment, and then get court authorization for a garnishment. You cannot just have your pay check, or any portion of it, taken without court approval, and you must receive notification and proper documents from the court first. Worst case scenario, you may need to negotiate a settlement that is higher than you would have liked, or commit to a payment plan in order to avoid a garnishment.
If you are being garnished, you typically can only be garnished for one debt at a time. Creditor pile-on is not allowed. If you are being garnished now, and have a line of creditors waiting to get paid behind that one, you should speak with a bankruptcy attorney to determine how that will assist you in getting back in control of your finances. Bankruptcy can prevent a garnishment from happening and can also eliminate a garnishment that may be affecting you right now.
If you found this debt settlement frequently asked questions page, and you are already being garnished, it is difficult to get good savings from debt settlement after the fact. The judgment creditor with the garnishment knows they will collect the full balance owed as long as you have the job. You can look to whether you meet garnishment exemptions or reductions in your state.
In states like PA, NC, FL, TX – wage garnishments for a judgment related to an unsecured debt like credit cards are protected.
For more on debt collection lawsuits, garnishments and judgments, read: Settling judgments and lawsuits.
Can I be sued during debt settlement?
Creditors have the right to file a lawsuit if you are not paying a debt. Being sued is one of the biggest concerns you should have before determining if debt settlement is something you should attempt.
Given how many accounts fall delinquent each year, lawsuits in order to collect are not that common. Don’t let this statement lead you to think it won’t happen to you though. Being sued means you will have to address that specific debt as a priority to settle before it becomes a judgment. Settling a lawsuit out of court and avoiding judgment is quite normal, but the rate of savings will generally not be as good as when settling debt that is not in the courts.
If you are only marginally suited to try debt settlement as a means to avoid bankruptcy, and you get sued early on, it may become a show stopper to continued efforts. You may then have to file bankruptcy due to not being able to fund an out of court settlement, or have to agree to a payment plan that will hinder your ability to save money to settle with other creditors later on. This can and does snowball into delays in settling other debts which can lead to more lawsuits.
Further: Threats of litigation are very popular, regardless of the fact that debt collectors are prohibited (by the FDCPA) from threatening legal action unless they’re authorized to do so. This does not stop collectors from making the threat. You will need to know which threats are credible and which are part of typical (and unfortunately abusive) debt collection efforts.
There are not many emergencies in debt relief. Heading off a judgment, or dealing with one already in place before bank accounts are levied and pay checks garnished, is one such emergency. Consider calling in to consult with me so I can help you calmly evaluate what your best options are and the next best steps to take if you are hyper-concerned about this, and especially if you already being contacted by a debt collection attorney, or have been sued.
Can I still settle my debt if I’m being sued by a collector or creditor?
Yes, it is still possible to come to acceptable settlement terms when you have been sued, or after a judgment has been filed. Negotiations after you are sued will typically be different than with accounts that do not involve an attorney or the courts. Your savings in a lump sum settlement will generally not be as good, but affordable payments are often available that can be stretched further than would have been available from the original creditor. This would allow you to avoid garnishment, lien or levy.
You typically have time to evaluate and learn all about the process of debt settlement over a fair stretch of time. Having said that, if you found this page and web site after having just been sued, this is a pressure and time sensitive event. How you approach dealing with being sued, and the path you ultimately decide to take, should be arrived at pretty quickly. If you are being sued, I would recommend you call me.
Can business or commercial debts be settled?
Yes, the process for settling business accounts is very similar to resolving consumer debts. Many small business owners personally guaranteed loans, so we often find that the debt is not that far removed from personal debt depending on the situation. The biggest caution when resolving business debt, such as credit cards in the business name, and business lines of credit, will be whether the company is still open for business and intends to stay that way.
Due to the way most businesses debt is handled (and often mingled with personal debt), it is best to speak one on one to determine if a plan can be put together to help you resolve the debts separate from your personal finances, or if a more broad approach would be better. Some banks do treat business accounts differently than they do settling revolving consumer credit card debts. You will want to identify any lenders you may have that are more friendly, or more difficult to negotiate with.
You are welcome to post additional questions in the comments below for feedback.