Debt settlement is the process of negotiating with creditors to reduce overall debts in exchange for a lump sum payment. A successful settlement occurs when the creditor agrees to forgive a percentage of the total account balance. Normally, only unsecured debts not secured by real assets such as homes or autos can be settled. Unsecured debts include medical bills and credit card debts—not student loans, auto financing or mortgages. For the debtor, this makes obvious sense, they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering, sometimes by more than 50%, their debt balances. Whereas, for the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file bankruptcy (in which case, the creditor risks losing all monies owed).
In order to work with a debt settlement company, a consumer needs lump sum cash or needs to build up enough funds over a pre-determined period of time. For consumers who have no cash to make a lump sum settlement offer, debt settlement companies set up a third party “trust” account where funds accumulate for the settlement process. A consumer makes monthly payments to the debt settlement company, or to the bank that holds the “trust” account. A portion of each payment is taken as fees for the debt settlement company, and the rest is put into the trust account. The debt settlement company’s fees are usually specified in the enrollment contract, and may range from 10% to 75% of the total amount of debt to be settled.
While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.
Depending on your financial condition, the amount of savings you obtain from debt settlement can be considered income and taxable. Credit card companies and others may report settled debt to the IRS, and the IRS considers it income, unless you are “insolvent.” You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine, talk to a tax professional if are not sure whether you qualify for this exception.
Settlement Disclosure Requirements
Before you sign up for the service, the debt settlement company must give you information about the program:
- Price and terms. The company must explain its fees and must tell you about any conditions on its services.
- Results. The company must tell you how long it will take to get results. That is, how many months or years before the company will make an offer to each creditor.
- Offers. The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.
- Non-payment. If the company asks you to stop making payments to your creditors—or if the program relies on you not making payments—the company must tell you about the possible negative consequences of doing so.
As you face the difficult challenge of paying down excessive debt, you will be making many important decisions. Before you determine which approach is best for you, talk to Trinity first. The Trinity team can assist you during this difficult time. We’re ready to do a complete analysis of your financial situation and formulate a strategy that best suits your needs. Remember, the choice you make today will affect your credit rating now and in the future. If your debt has you down, we should talk. Call (800) 758-3844 or complete our online application. We can help you become debt free for keeps.