Debt Relief FAQs
What is debt consolidation?
Taking out one loan to pay off two or more loans or debts. The benefits are a lower monthly payment and interest in most cases, but a longer length of payment. The result is a consolidation loan. This is very common with student loans since most students have several loans after graduation.
What is debt settlement?
It is a process of negotiation with creditors, where balances are settled at a reduced rate. Settlements can be paid off in a lump sum or in monthly payments. This can be a good choice if you cannot pay off your debts in less than 3-4 years or if you have financial hardship and are falling behind on your monthly minimum payments. Debt settlement is sometimes referred to as debt negotiation or debt arbitration, but is not to be confused with debt consolidation.
How will my credit score be affected by enrolling in a debt relief program?
That depends on the program. It also depends on your current score. If your credit score is in the 600’s then it will have a smaller impact than if you have a score in the high 700’s. Recent data released by FICO shows that having a settlement on your report will cost you 45 to 65 points if you have a score of 680. If your score is 780 it will drop your score 105-125 points. FICO states that credit counseling has no affect, but no information has been released on how much debt consolidation effects your score.
Are non-profit debt relief companies safer or cheaper?
Unfortunately the non-profit status of a company can be very misleading. Typically non-profit companies receive their payment directly from the creditors. Due to the conflict of interest between the non-profit workers and the creditors, many scams have arisen. The non-profit receives more money if the creditors collect more money, which leaves the client at a disadvantage. Some for-profit companies actually take a fee from the amount saved, which may result in the client saving more money.
Does credit repair work?
Do not pay for credit repair. You cannot repair bad credit. You can only repair incorrect information on your credit report. Beware of credit repair services that promise to improve your credit score. The only way to improve your credit is the old fashioned way, such as, making payments on time.
What makes up my credit score?
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
Types of credit used – 10%
New credit – 10%
It varies from company to company. This is a simplified version of what FICO uses to determine your credit score.
Will all my creditors settle and work with debt settlement companies?
Most creditors will work with debt settlement companies because they rather retrieve some of the balance rather than nothing. There are a few creditors that may refuse to work with a settlement company, but most of the major creditors do.
Can I settle my debts myself?
Absolutely. If you only have a couple of accounts with a total debt under $10,000, you can negotiate with your creditors, but most people will not know what a fair or good settlement offer is. Also, you will have to deal with your creditors and collectors directly. If you have more than $10,000 in debt or numerous accounts, it may be beneficial to get professional help and have them deal with your creditors.
Do I have to pay taxes on a debt that has been settled?
Yes and no. It depends on the type of debt that was forgiven. In 2007 the Mortgage Forgiveness Debt Relief Act was passed which means if the debt resulted in a foreclosure or mortgage restructuring then the debt is not taxable. However, you must still report any forgiven debts on your taxes. This article by the IRS explains in detail what you will be responsible for and what changes have been made.
Why won’t the creditors negotiate my balance with me?
The account has to be delinquent. A status known as charged off, which means over 180 days late. If you are current on your payments or only a month late, they will definitely not negotiate. Creditors only negotiate if there is a potential that they may not receive any payments. By negotiating they are hoping to receive something rather than nothing. Therefore, the later you are on payment, the better the negotiations will go in your favor.
What states are creditors not allowed to garnish wages in?
North Carolina, South Carolina, Pennsylvania, Texas, and Florida (if head of household).
What is the statute of limitations?
The statute of limitations for debt is the amount of time creditors can file a lawsuit on an unpaid debt. However, creditors and collectors can still try to collect the debt. The SoL (statute of limitations) varies from State to State. Here is a link for more information on different laws in your State. A SoL on a debt can become void if you admit to the debt being yours. In other words, if the creditor is asking you if this is your debt and you respond yes, the debt is reactivated. The SoL will no longer apply.
What type of debt is acceptable in a debt settlement program?
Credit cards, unsecured personal loans (no collateral), medical bills, collection accounts, and repossessed car loans are usually accepted.
What type of debt is not acceptable in a debt settlement program?
Payday loans, student loans, mortgage loans, auto loans, and loans with collateral are usually not accepted.
How long does a debt settlement program last and how much will it cost?
Typically 12-48 months. There are a lot of variables on the time frame such as financial hardship, the amount of debt, how much you can save on a monthly basis, the age of the debt. The more a person can save, the faster they can finish the program.
Debt settlement companies usually charge anywhere from 15% to 20% of the total debt enrolled. Some charge additional fees upfront.
Will the collection calls stop?
No, all calls cannot be completely stopped. If you are enrolled in a debt relief program, the calls may be lessened. However, collection agencies will still have the right to call you. You can send a cease and desist letter to the creditor which will prohibit them from calling.
Can I get sued while enrolled in a debt settlement program?
Yes, there is a possibility of getting summoned. No companies should put you on a program longer than 48 months because the possibility of getting sued is enhanced. Good debt settlement companies will try to get a resolution after being summoned.
What should I say to creditors and collectors if I can’t pay my monthly minimum payments on time?
You can tell them your going through financial hardship and doing everything to make a payment. It is best not to reveal too much to the collector because they can use what you say against you. They are paid to be aggressive in collecting the debt. However, there are very clear guidelines collectors are not allowed to cross. Collection agencies are not allowed to harass you. Look at the guidelines here. You can also get the collectors to stop calling you by sending them a cease and desist letter.