Consider Debt Settlement Carefully

Online, November 10, 2011 (Newswire.com) - Millions of consumers are in debt so deep they feel they'll never get out. Who can help them? Their only help, outside of bankruptcy, is debt settlement. Or at least, that's what the debt settlement industry says.

Don't confuse debt settlement or debt negotation with debt consolidation. Debt consolidation is when borrowers are offered a loan to pay off smaller debts. Debt settlement is when creditors allow debtors to make lower-interest payments in order to pay off debt over a period of time.

Debt settlement plans offered by those in the industry are entirely different. These companies will encourage consumers to stop paying bills and save up cash so that they can then use the money to pay lump sum settlements, which the debt settlement companies will negotiate.

This type of debt settlement can be dangerous. Some companies that offer debt settlement are here today, gone tomorrow - they get up-front fees and then they're gone. Others are far too inexperienced and unable to successfully negotiate effective deals.

The advice to not pay your bills in order to save up a settlement payment is foolish. Failing to pay your bills will ruin your credit scores. Not to mention the fact that creditors are using debt collection law firms more and more which are quick to file lawsuits when borrowers default. A lawsuit can lead to wage garnishment or liens on your property.

Even scarier is the fact that the federal government does not regulate debt settlement companies, although the Federal Trade Commission is imposing some rules.

And consumers would be wise to remember that the IRS considers the difference between what you owe and what you pay out in a settlement as taxable income. If you are in the 25 percent federal tax bracket, you could owe $2,500 for every $10,000 in debt that is forgiven.

Debt settlement can also be cost prohibitive, and it doesn't come cheap. Some companies charge 14 to 18 percent of the total face value of the debt you want settled.

And on top of that, debt settlement isn't a quick solution. The average debt settlement process takes about two years.

If you are considering debt settlement, be prepared to do a lot of research. You'll want to choose the company you work with carefully. Legitimate companies won't accept you if you can actually pay your debt, and have written policies and procedures about their debt settlement program. These legitimate companies also negotiate on an ongoing basis with creditors, and present all settlement offers to customers for approval - they won't make an agreement on your behalf.