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What is the Debt Settlement Option?

Financial problems come in all shapes and sizes, as do the options for resolving those financial problems. For some people the right option is to create a stricter budget and stick to it. For others, bankruptcy is the only feasible way out from under a mountain of debt. And for others still, settling debt might be the way to go.

What do you need to know about the debt settlement option?

Debt settlement allows you to resolve a debt for less than you actually owe. Many people work with a third-party company to help them with debt settlement. It’s possible to arrange a settlement with a creditor, but when you have several debts owed and you are having a difficult time getting a handle on things, you might need assistance from a professional when it comes to negotiating with creditors.

In most cases, working with a debt settlement company means you will need to make a monthly payment that is distributed among your creditors, as well as to the debt settlement company for their fee. Even though you are making payments on a monthly basis, the debt settlement company holds most of the money in an escrow account for future payment to a creditor.

In most cases, the contract you sign with the company is “front loaded,” similar to the way in which mortgage interest is handled. For the first several months or years of your settlement plan, what you pay will go toward the debt settlement company’s fees. As time passes and you accumulate enough in the escrow account, the settlement company negotiates a settlement with the creditor.

Debt settlement might be the right option for some people, but there are several negative issues you need to consider, including:

  • Initially and perhaps for several months, you are defaulting on your monthly account payments to your creditors, as the majority or all of the money you now pay goes to the debt settlement company’s fees and is being “saved” to offer later as a settlement.
  • Your credit continues to suffer, even though you feel as if you are getting a handle on things.
  • Creditors still have the right to contact you about your debts.
  • You are still at risk for being sued by your creditors and the lawsuit can still result in wage garnishment or property seizure.
  • Debt settlement is not guaranteed – your creditors might not be willing to accept the settlement offered by the debt settlement company.
  • You’ll be responsible for taxes owed on the settlement – forgiven portions of debt are considered taxable income, so you could end up with a whole new debt owed to the IRS at the end of the settlement.

Government regulation over debt settlement companies has gotten tighter in recent years, but there is still a great deal of risk involved. Before committing to a debt settlement arrangement, it’s important to explore all of your options and determine if this option is right for you, and if the settlement company you’re considering is reputable.

For more information on debt settlement regulations, visit the FTC’s Consumer Information page.

If you would like to know more about debt settlement or you want to discuss all of your options when it comes to dealing with debt, we can help. Contact the Law Offices of Robert M. Geller at 813.254.5696 to schedule a consultation free of charge.

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At the Tampa Bay law firm, the Law Offices of Robert M. Geller, P.A., we help people with consumer bankruptcy matters in the Tampa Bay-St. Petersburg,  Florida communities such as Clearwater,     St. Petersburg, Tampa, Thonotosassa, Riverview, Lutz, Plant City, Brandon, Carrollwood, Wesley Chapel, St. Petersburg Beach, Lakeland, Mulberry, Dade City, Pinellas Park, Largo, Seminole, Odessa, Oldsmar and Lithia, and counties such as Hillsborough County, Pinellas County, Pasco County, Polk County and Manatee County.