Life is unpredictable, and often, things happen that can cause people to fall behind on debt payments, such as when they lose a job, become ill, or lose track of how much is being charged to their credit cards. When debt-to-income ratio reaches critical levels, people can quickly become overwhelmed, and as such, often turn to debt relief options. A popular option is debt settlement, but what is debt settlement actually?
What is Debt Settlement?
Debt settlement is an agreement between creditors and an individual to accept a lower than owed amount to close the debt or debts in question, often at a fraction of the original debt. The lowered amounts, coupled with a single monthly payment plan, make this debt relief option attractive to many people facing hardship due to a temporary reduction in income or other events. However, the many pitfalls associated with debt settlement may cancel out the perceived benefits. By becoming educated on the ins and outs of several debt relief options, as well as consulting with an experienced bankruptcy lawyer in Philadelphia, people can avoid additional stress and find the right option for their personal needs.
Pitfalls of Debt Settlement
Creditor Refusal: The pitfalls of debt settlement can blindside someone who is unprepared. One such drawback is the creditor’s right to decline any settlement offers. While creditors will often agree to a reasonable settlement offer to help offset the costs of holding the debt, they are under no obligation to accept less than what is owed to them.
Damage to Credit: Another major pitfall to this type of debt relief option is the impact settlement can have on a person’s credit report. Defaulting on loans, delinquencies, and missing payments all have a negative impact on a credit report. Settling debts for lower than owed amounts can adversely affect the credit report as well, depending on how the creditor reports it to the credit agencies. In the event they report that the debts have been paid in full, the credit score can increase; however, if they report that the debts in question have been settled for less than owed, or if they fail to report the settlement at all, the score will continue to decline. Bankruptcy may be the better option to help prevent years of credit issues after the settlement has become finalized. Bankruptcy can repair your credit score fairly quickly.
Hidden Costs: People who are considering debt settlement are expecting to have to pay a portion of the debt. However, they may be unprepared for the additional costs associated with the settlement. Some such costs include continuing interest and late fees that could be charged in addition to the payments. When looking into debt relief options, the best course of action is to contact an experienced bankruptcy lawyer in Philadelphia, such as William D. Schroeder, Jr.
Unethical Practices: A good bankruptcy lawyer will help you evaluate your choices and make the best informed decision. Debt settlement may be the option you choose, but an attorney can help you avoid being taken in by unethical parties or practices. Some unscrupulous people use the promise of debt settlement to entice a debtor into a payment plan that will “lower their monthly payments and help them get back on their feet.” Sometimes these individuals or agencies will keep the money rather than using it to pay the bills or sometimes a debtor may even find later that the agency failed to negotiate terms with the creditor on his/her behalf. This type of fraudulent activity costs money as well as causes a great deal of harm to one’s credit report.
Bankruptcy lawyer William D. Schroeder, Jr. has been helping people in the Philadelphia area for over 30 years find solutions to their debt issues. Contact us today to learn more about the potential pitfalls of debt settlement, or to schedule a debt relief consultation.