subject: Avoid Bankruptcy: Settle Your Debts [print this page] Debt settlement companies - sometimes specialized financial services or law firms - may make you believe that only they can reduce your debt and help you out of financial hardship.
But that's not completely true because if you refer to the fine print of their agreement it says that even though they will manage your account and talk directly to the creditors, they are nonetheless powerless in the event that the creditors lodge a formal complaint against you.
Debt settlement companies are having a field day with today's economic environment of rising unemployment rates, soaring interest on unsecured loans and overextended credit. If you find yourself struggling to make payments and unable to reach anyone that can help you at your creditor's customer service number, it is easy to turn to such a firm for assistance.
These companies will ask you to stop making payments and instead send them the money, typically for less than what you were paying your creditors so all of a sudden you feel somewhat relieved. They will then send you an agreement stipulating that you are granting them special power of attorney in communicating with your creditors, asking you to refer collection efforts to them, and that you agree to escrow a portion of the funds that you've been sending them to pay off your accounts once a settlement agreement is finalized.
Your first and second month's statements will generally be received from your creditor before you receive any type of collection notice. Collection notice may be either by letter, phone, or both. If you provide the creditors with the contact information of the debt settlement company, or forwarded them a copy of the collection letter, you may be able to avoid further contact from your creditors for the time being.
If the amount to be settled is not that high and you still have some savings or equity on your house left, you might want to listen first to what the collection officer has to say. He would explain that no one at the credit company could do anything about your account until such time you defaulted on your payments and got referred to their company. At that point, they may be able to help.
If you have a hardship of some kind, many companies will offer to settle for half of your total debt, which by this time includes late fees and additional interest. This amount will probably be less than the debt settlement company expects to escrow for payment and doesn't even require involving another party, however it will be a limited time offer so you do need some financial resources. If you are still unable to meet that amount, some companies may even decide to bring it down further provided you settle it in a specified amount of time.
Some are able to settle their debt with the amount offered by the collection company as reprieve in some instances. Other times, you may wish to go with a debt settlement company, which will not save your credit but may help calm your nerves. Last option would be to file for bankruptcy if the debt is way too high and you are in a dire financial condition.
Remember however that if a creditor writes off a substantial amount of your debt that you are required by law to report it as income and pay corresponding taxes the following year. This is applicable regardless of whether you did the work yourself or hired another party to do it for you.
