• Your current credit score.
• Your account statuses and previous payment history.
• How much total debt you have.
• Your Debt to Income Ratio
• What other installment accounts you have.

First, take a look at your credit score. If it is already lower than the mid 600 level, then your impact is going to be much less than someone will a 700 score. If you have a perfect payment history and a great credit score, you may want to think about debt consolidation, although those options are becoming more limited with the recent downturn in the economy.

If your accounts are already behind and/or if you have missed some payments in the past, debt settlement’s credit impact is probably going to be much less severe.

Other factors you should taken into account if your current debt load and your debt to income ratio which you can calculate using the link above. Even if you have great credit, if your DTI is too high, lenders will probably still deny you for financing with the new underwriting laws that have been enacted.

Other installment payments, such as a mortgage or car payment, will help to keep your credit score up during the process.

The bottom line comes down to savings vs credit score. Your credit score is going to take a hit unless it is already very low. You have to decide for yourself whether that hit is worth you saving 40-60% of your current debt load.

First, your accounts fall delinquent while you are on a settlement program. To a creditor, it looks like you are maybe having some sort of problem with your job or some other hardship. It has been statistically proven that someone who falls more than 90 days behind on their bills is never going to catch up. Because of this the creditor will charge off or sell your debt to a collections agency for pennies on the dollar around the 90-120 day mark. The original creditor is able to recoup a little bit of their loss and can write the remainder off on their taxes.

So the account is now in the hands of a third party collections company. They have purchased the account for as low as 10-15 cents on the dollar. Statistically, they know it is going to be difficult to get money from you. So when your negotiator calls up and makes them an offer of 40% of the original balance (which is probably 2-4 times what they paid for the debt), they are probably very likely to accept that settlement. If not, the negotiator can let the account sit out a little longer and try a similar offer again.

The settlement percentage obviously depends on a number of factors including the original creditor, the collections company, the amount and so on but this should give you a general idea of how and why settlement works.

Credit Counseling and Debt Settlement are two very different programs. In Credit Counseling, the interest rates on your accounts will be negotiated, usually down to around 10%. Usually, your accounts will also be closed. This means you will pay back approximately 110% of what you owe. Credit counseling will also leave what is called a third party fingerprint on your credit report. So while your credit score may not go down during the program, lenders will see that you had to have assistance in paying off your debts, which may make obtaining financing more difficult.

In Debt Settlement, you will pay back 40-50% of what you owe plus fees, which are generally 15% of your debt amount. This means you will pay back 55-65% of your total debt amount. Your accounts will show as behind while you are on the program (which is why debt settlement is great for accounts that are already behind or in collections) and your credit score will be negatively affected. When you finish the program, your accounts will show as settled with a zero balance. To lenders, it will look like you fell behind but then were able to pay off your creditors in full BY YOURSELF!

There are many other pluses and minuses to each program. You sure be sure to ask if there are late payment fees, etc. Generally, debt settlement programs are much more flexible than counseling programs, allowing you to reduce or skip payments with no charge. Again, be sure to shop around and get all the details before signing.

The answer is that financial institutions are required to report any canceled debt over $600 to the Internal Revenue Service. That means that if you save over $600 on an account during the settlement program, that creditor will be required to report that debt and you will also be required to report it on your taxes. However, if you are insolvent, meaning your debts are more than you own, then you are not required to pay taxes on those forgiven debts. The majority of the time, this is the case for people looking at settlement programs.

If you have a lot of equity in your home, the above may not apply to you. Even so, would you rather pay tax on $5000 or actually pay the $5000 back?

There are three fees to look at when shopping for a debt settlement program: the setup fee, the settlement fee and the monthly fee. The setup fee, as discussed above, is usually 15% of your total debt amount. Some companies will also charge a monthly fee, usually between $20 to $50 per month, this usually covers bank transactions. Some companies will also charge a settlement fee, a settlement fee gives the company a percentage of the money they save you. If they charge a 10% settlement fee and settle your $10,000 of debt for $4,000 - they will be entitled to another $600 on the backend for saving you 60%. Watch out for companies that charge both a setup and settlement fee, you can almost always find a better program elsewhere.

There are some companies out there moving toward a smaller setup fee and a larger settlement fee. Typically two to five percent setup fee and 25 to 35% settlement fee. Most of them also charge a monthly fee. This can be a good option for some people, be sure to weigh all your options first though, as you may end up paying a lot more money for savings you could have had with another company.

Creditors will usually step up their collection efforts right before a charge-off occurs. They may even use tactics that go against the Fair Debt Collections Act. Remain calm, either tell them that you can not afford to pay and to please stop calling you or do not answer the phone if you know it is a collector. Collectors will often push for a payment that you can not afford or for a post dated check. Do not cave in to these! These will just result in a bounced check and more financial problems.

After the charge-off, the account will be sold to a collections company for a fraction of what you owe. This collection agency will probably begin to hound you for payments. Luckily, once the debt is sold from the original creditor, a cease and desist letter can be used to stop creditor calls.

There is good news. An account that has charged off is a perfect account for a debt settlement program. Since your accounts have to fall behind on a debt settlement program, a charge off is just putting you one step ahead of the game.

Debt consolidation loans are very difficult to get financed for in our current economy. With consolidation out of the picture, the two most viable options to debt problems are debt settlement and bankruptcy. Debt settlement has become popular in recent years because of the difficulty in obtaining debt consolidation loans and because of the changes to the bankruptcy laws in 2005.

Debt settlement is a method where your debts are negotiated with your creditors for a payoff that is less than what you owe (20-60% usually). In a typical debt settlement plan, a debt negotiator will compile a list of your debt, set you up on a fixed monthly payment into a trust account and negotiate balances with your creditors as the funds build in the account. Debt settlement may have a negative effect on your credit score since your accounts will show as behind while you are on a program. When you are finished though, the accounts will show as settled with a zero balance.

Bankruptcy is a legal procedure for discharging your debts. As with any legal procedure, there are courts to deal with and that means paying for an attorney to help you navigate through the legal process. There are two types of bankruptcy for individuals, Chapter 7 and Chapter 13. A Chapter 7, which most people think of when they hear about bankruptcy, effectively wipes the slate clean. With the changes in 2005, called the Bankruptcy Abuse Prevention and Consumer Protection Act, obtaining a Chapter 7 has become much more difficult. A Chapter 13 is, in effect, a court ordered garnishment where you pay back your debts over a 3 to 5 year period. The worst thing about bankruptcy is that it will ruin your credit for the next 7 to 10 years of your life.

It’s not surprising that many people are choosing debt settlement over bankruptcy. It can turn out to be even more cost effective than bankruptcy and it allows you to do the right thing and satisfy your debtors. While debt settlement may make a temporary dent in your credit report, it will not destroy it for the next decade.

#1
Q: Are you a member of TASC (The Association of Settlement Companies)?

• TASC is a regulatory body in the settlement industry. TASC member companies are required to disclose all fees and program terms to clients. Make sure you choose a TASC member!

#2
Q: Where will my funds be stored?

• NEVER go with a company that holds your fees! If they are a fly-by-night or if they go out of business, you will lose all your money. Make sure they set up an account for you at an FDIC insured bank.

#3
Q: What are your fees?

• 15% of your debt amount is the industry standard but be sure to shop around! There are reputable companies out there that charge less. Also be careful of companies that charge a large settlement fee, this often results in them making much more money from you.

#4
Q: Do you work on commission?

• If the salesperson works on commission, they probably do not have your best interests in mind. They want to sign you up so they can make money, even if the program is a bad fit for you.

#5
Q: Can you stop all my creditor calls?

• No company can stop all your creditor calls. If they claim otherwise, it should be a definite red flag!

#6
Q: Will you be making monthly payments to my creditors?

• Again, another big red flag if they say yes. Settlement works by letting your accounts fall behind.

#7
Q: Can I get sued while on your program?

• You can get sued while on a debt settlement program! Any other answer is untrue.

#8
Q: Will the program have a negative effect on my credit?

• Debt settlement programs will have a negative effect on your credit. The amount depends greatly on your personal situation but any company that claims there will be no credit effect is not giving you the whole story.

#9
Q: Can you tell me EXACTLY how much this program will cost and how long it will take?

• Settlement is not a science. Legitimate companies will tell you that their quotes are estimates (usually based on a 50% settlement) but program cost and length will vary according to actual settlements.

#10
Q: What are the tax consequences of the program?

• You may be required to claim any debt forgiven over $600 as income. There are exceptions to his (ask your accountant) but any reputable company should be upfront with you about the tax implications.