Debt Settlement

A big question most people ask before joining a debt settlement program is “What are the tax consequences of this program?”.

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?

Tags: Debt Settlement, debt settlement program, debt settlement taxes

How much is a debt settlement program going to cost? The industry average is 15% of your total debt amount. That 15% is usually spread over the first half of your program, which typically lasts between 12 and 36 months. Most reputable companies will keep you on the same payment throughout your entire program. Be wary of companies that charge you more for the first two or three months, they are usually just trying to get more fees out of you upfront.

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.

Tags: Debt Settlement, debt settlement fees

A charge-off occurs when a bank or financial institution writes off an account as bad debt. This process usually occurs after six months of non-payment. Many creditors will try to tell you that a charge off will ruin your credit score. While charge-offs should certainly be avoided, if you are unable to pay the bill, it is not the end of the world.

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.

Tags: charge off, collection efforts, credit score, debt collections, debt settlement program, debt settlement programs, post dated check