We've all seen the ads on television. A company that will work on our behalf to settle our debts for a fraction of what we owe. So who are these companies and why does it sound like such a great idea?
These companies are called Debt Settlement companies. When you fall far past due with your creditors, you may be tempted to pursue a debt settlement company.
So how does it work?
When you call the debt settlement company and disclose your debt information, they act on your behalf to negotiate settlements with debtors. Many debt settlement companies require you to pay a fee for their service.
Let's have an example: Suppose you owe $3000 on a credit and it is 8 months past due. You decide to use a debt settlement company. The settlement company calls your debtor and manages to negotiate a settlement for $1200. What a relief, only $1200, right? WRONG. There are a few things to remember.
In terms of the IRS, any settlement where more than $600 is being "knocked off," you are required to pay income taxes on. In this case, the income tax is on $1200. $3000-$1200-$600=$1200. Secondly, in terms of your credit bureau report, often settlements are viewed just as badly as bankruptcy.
So.......................what other option do I have then?
Your best bet would be to contact your debtor directly and work with them. Many creditors have payment plans in place to help you make payments. Its also possible to have fees waived or interest rates reduced.
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