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Debt Management Law News

April 20, 2009

How to get rid of debt without filing bankruptcy

If you're knee deep in debt, cannot pay your bills and wish to avoid collection calls, you may consider debt settlement (also known as debt negotiation). This is when you negotiate and reduce the outstanding debt by 40-60% of the amount you owe. The creditor forgives the remaining debt thereby helping you to get out of debt faster.

With proper help you can
Lower your monthly payments
Reduce interest rates
Waive late fees
Eliminate collection calls
Avoid bankruptcy
Have only one monthly payment
Become debt free

How debt settlement can help you

Whether you go for credit card debt settlement program, or settlement on personal loans, payday loans etc, you get the 5 benefits as given below.

1. Avoid bankruptcy: With debt settlements, you can reduce your debt burden and pay off bills comfortably. You can negotiate with the creditors or collection agency (CA) and settle your debts for as much as you can afford to pay. Thus, you don't need to file Chapter 7 bankruptcy. There are chances of losing your home or car in bankruptcy wherein your assets are sold off to pay your creditors.

2. Single payment: Instead of paying multiple bills each month, you'll have to make a single monthly payment to the settlement company. The monthly payments are accumulated in a trust account in order to be paid off to your creditors/CA after negotiation. So, you can avoid the stress of paying debts at different rates and dealing with several creditors at a time.

3. Avoid unfair collection practices: You can avoid unfair collection practices and harassment by debt collectors if you negotiate a settlement.

4. Eliminate extra charges: The settlement company can try and eliminate late payment fees, if any. Any over-the-limit fees on credit cards can also be minimized or eliminated by way of settlement.

5. Avoid lawsuit & other legal actions: Creditors or the CA can file a lawsuit, get a judgment order and garnish your wages or place lien on your property. You may be able to avoid such legal actions if you're in a settlement program.

How Debt settlement program works

Debt settlement companies offer a settlement program wherein they negotiate with your creditors/CA in order to settle the debt for less than what you owe. The companies charge an upfront fee for their services.

Whether it's a credit card debt settlement program or one which includes other debts, you need to stop paying your creditors. Instead, monthly payments should be sent to the settlement company, which will deposit the funds into a trust account.

Once enough funds are accumulated, debt settlement companies negotiate with your creditors/CA and attempt to stop all collection efforts. For further details, check out the 6 steps in debt negotiation program.

Debts you can settle

Credit card debt settlement is quite common. Other than unsecured credit cards, medical bills, gas/store cards, personal loans etc can also be settled. But tax debts, alimony, child support, mortgages, car loans and federally insured student loans are excluded from a settlement program.

How much to pay for settlement

Debt settlement companies charge 25-35% of the debt balance that is forgiven under the program. The fees are based on:

* How much you owe in total
* Number of debt accounts you have
* How much you'll save by settlement

How long it takes to settle debts

Whether it is credit card settlement or settlement to pay off personal loans, medical bills and other debts, it usually takes 2-4 years to complete the program. The period of completion depends upon your total debt amount.

Creditors may not sue after settlement

Once you negotiate debt settlements with your creditors/CAs, they may not come after you for the balance. It is illegal in many states such as Arkansas, Texas, Georgia, Michigan, Washington etc. However, in other states such as Alabama, Delaware etc, the creditor retains his right to sue you under certain conditions.

You may owe taxes

Once you go for credit card settlement or settle other debts, creditors will forgive a percentage of what you owe. This forgiven debt, known as cancellation-of-debt (COD) income, is taxable as per IRS guidelines.
How settlement affects credit score

While you stop paying creditors and accumulate funds to settle debt, some of your accounts may be charged off. This means that the creditors may no longer consider the debt as collectible. They may even sell off your account to a collection agency who'll try out means to collect the debt from you.

However, when the debt settlement companies start negotiating, the creditor may not send it to collections and agree to accept a partial payment. The creditor then reports your account status to the credit bureaus, such that it appears on your credit report as "Settled charge off".

A "Settled charge off" is less negative than a bankruptcy on your credit report. Thus, credit card debt settlement or settlement on any other debt hurts your credit score for the time being. However, after the account is paid off, your credit will improve gradually if you keep making on-time payments towards other debts and liabilities.
How to repair credit after settlement

Here are 5 tips on how to repair credit after you negotiate credit card debt settlements or settlement on any other bills.

1. Get secured credit card: Such a credit card is easily available to those with poor credit history. The purpose of such cards is to help one improve his credit score. Know how secured cards work.

2. Gas/Store cards: These are easy to qualify for. Once you avail such cards, use them every month and pay more than the minimum payment. Try not to use more than 50% of the credit line at any time. Once you're able to show a positive credit history through the gas/store cards, you can apply for a higher credit line.

3. Savings account: Open a savings account and deposit funds every month. Once you have enough savings, you can pay for unexpected expenses without having to use a credit card. Moreover, you can take out a small loan with the savings account as your collateral. You can even use this account and get a secured credit card.

4. On-time payments: Pay your utility bills and rent/mortgage payments on time.

5. Avoid unnecessary credit: Do not take out unnecessary credit and raise your debt-to-income ratio. Make sure you avoid taking out payday loans right after settlement, because in case you fail to repay, it'll hurt your credit even more and you'll end up in debt again.

Sometimes, debt can be overwhelming, and bankruptcy becomes necessary.
Bankruptcy can sometimes be difficult. If you are considering bankruptcy, contact the Houston bankruptcy lawyers of Weston & Associates, PLLC at 713-623-4242

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