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Debt settlement is another good tool to get rid of your debts. In fact, it has lots of potential to balance your budget. As a bankruptcy lawyer in Nevada, I have first hand information about the impact of current deep financial crisis in our major and rural cities especially Las Vegas. We all know about the dreaded housing markets. Nothing is hidden and it would be plainly counterproductive to do a housing analysis here as this has been done many times already. We recommend clients of seven rules which can help them to get the most out of debt settlement. I understand a debt settlement is a viable option but one should know that it should be handled tactfully and of course with strong determination to finish to the end. Now, keep in mind that bankruptcy is another very strong option if everything else fails.
There are some golden rules of debt settlement. Let us see and discuss them one by one.
1. Financial Hardship. Your must be going through a financial crisis in order to be helped. This is the prime most thing. You need to prove or narrate some financial hardship like job loss, disability, matrimonial problems, child care, education, and other emergency needs. You must financial hardship in order to qualify.
2. Your creditors would not pay any strong attention unless you are not behind and miss few payments. In fact, the creditors have various departments like loss mitigation and collection. The collection folks are very aggressive, and do only collection. That is what they are taught, and of course they get some commission, once debts are settled. Loss mitigation department would only talk to you if you are behind on your payments. Your creditors have no reason to offer you a break on the debt you owe them as long as you continue to make payments. Sure, they may give you a lower interest rate if you give them a hard luck story, but you will not get significant reduction in principle balance on your debt until you miss some payments. You have to prove that you are very risky in order for them to pay close attention to you. Of course they lenders would also suggest you in missing few payments.
3. How about offering a lump sum of cash. This is required because a lump sum removes their risk. In general, they are not going to cut your balance if they continue to have risk. Also, it stops their worries about you. They need to move on to the next person, and here you are drawing their most attention.
4. Most debt settles for 40% to 80% of what you owe. Offer them something unreasonable. Once they know you are unreasonable (of course not too much), then they would listen to you. This means your lump sum will likely have to be this big. You start by offering 10% or 20%, but you may not get a deal done until you have 40% or more of what you owe in a lump sum.
5. Can you settle debts yourself? There are companies which specialize in this, but settling debt is no magic trick. One of the primary functions these companies perform is advise you to stop paying your credit card bills and pay them some monthly amount instead. This has the effect of worrying your creditors (#2 above) while building a lump sum to offer them (#3). You can do this yourself. If you can save a lump sum by not making monthly payments to your creditors or you already have a lump sum, all you have to do is start missing payments. At that point, your creditors will contact you. Now you can begin the negotiations!
6. If you want to go with a debt settlement company, DO YOUR HOMEWORK. These companies often take your money to help you build up a lump sum. They are not a bank and this money is not FDIC insured. This is a recipe for you getting robbed. To avoid this, I suggest you choose a company from The Association of Settlement Companies (TASC). You may also want to choose a company with Better Business Bureau accreditation.
7. Be aware of the costs of debt settlement. The costs of debt settlement are generally threefold. First, debt settlement hurts your credit score. The effect is not as much as bankruptcy, but is nonetheless significant. Second, if you use a debt settlement company, they will generally charge some percentage of what they settle. This is generally more expensive than a bankruptcy attorney. Finally, the amount of debt forgiven is reported to the IRS as taxable income!! Depending on your tax bracket, this means you will pay 35% or more of the amount forgiven by your creditor to the IRS. I know – this makes the savings of settlement a lot less exciting.
Remember: Bankruptcy as an alternative to debt settlement. Depending on your income and assets, you could do much, better in bankruptcy than debt settlement.
– Many debtors can wipe out debt in bankruptcy without paying their creditors anything and without losing any property.
– Attorney fees and court fees for bankruptcy are lesser compared to any other alternatives.
– The removal of debt in bankruptcy is NOT taxable.
– Many debtors wipe out tens or even hundreds of thousands of debt in bankruptcy for less than less than $5,000 (in many cases, for less than $2,000). Debt settlement can’t touch this kind of result.
In our law office, we give free consultation. Your creditors know their alternatives (pursuing judgment or selling your debt to a third-party collection company). You should know yours.