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The answers to your Debt Settlement questions are found here. Browse around to find new tips and advice from our helpful list of FAQ's
Q: Can I be sued if I'm enrolled in a debt settlement program?
A: Yes. Unlike bankruptcy and debt management programs (DMPs), debt settlement programs offer no legal protections. Whereas a DMP is an agreement between a debtor and his creditors, debt settlement is much more antagonistic. People who enroll in debt settlement plans have forsaken any chance of working with their creditors, and are taking a more hostile approach. Sometimes this is warranted, but as such, creditors may sue you if they believe they'll be able to collect.
The main thing to consider before enrolling in a debt-settlement plan is whether or not you are a likely target for a lawsuit. Could you pay back your debts, in full, if you emptied your bank account and sold off some of your luxury assets? If so, you may be a likely target. But if you're really struggling to make ends meet with the crushing burden of your debts, you're highly unlikely to get sued. After all, the creditor has to believe he can actually recover damages, and ultimately, you could always just file bankruptcy anyway. For these reasons, legal action in debt-related matters is somewhat rare.
Q: Can I negotiate a settlement with my creditors on my own?
A: Yes, you can. However, there are two things to keep in mind: 1) Credit counselors, DMP specialists, and debt arbitrators are trained professionals who work with creditors on behalf of clients every single day -- even if you follow the advice of this FAQ, you are unlikely to be as effective as an industry professional. 2) Dealing with creditors and bill collectors can be a real hassle, and it's easy for people to give up and throw in the towel. When you hire a professional, it is their job to deal with the headache, not yours. Furthermore, there are a lot of emotional issues surrounding unpaid debts, and when you have a professional working on your behalf, he or she is not caught up in the guilt or shame that you may be. This gives them better resolve when dealing with your creditors.
That said, there is certainly nothing to stop you from attempting to settle your debts on your own. In fact, although a professional may implement techniques better than you're able to, they aren't able to do anything you can't do for yourself.
The #1 rule when dealing with creditors is to get everything in writing and to maintain a record of all correspondence. If a creditor makes an offer over the phone, be sure to ask that they send it via mail, as well.
Q: How can I find reputable debt negotiation and settlement services?
A: First, check the Better Business Bureau (
www.bbb.org
) for any complaints about the service. Secondly, consult the Federal Trade Commission's Web site at
www.ftc.gov
. In general, you should avoid debt-settlement companies who:
- Have an "unsatisfactory" rating from the Better Business Bureau
- Spend less than a half-hour talking with you before trying to sign you up and take the first check
- Encourage you to sign a contract without thoroughly reviewing it or having an attorney take a look at it
- Require "voluntary" contributions
Q: Is a debt settlement program guaranteed to work?
A: A debt settlement program is not a silver bullet or a magical cure-all for debt-ridden consumers. It is possible that your creditors will not accept your settlement offers and may take legal action to force you to pay your outstanding debts, in full. However, given the expense of taking legal action, debt settlement programs are more likely to work than not. Creditors view debts in the aggregate (total) and, typically, it's a lot more cost-effective for them to agree to your debt-settlement terms than it is to take legal action to win a judgment, and then, if they're successful, take further legal action to get you to pay -- and that's if you're even able to pay. Taking all of these factors into consideration, you can see why debt settlement plans work most of the time.
Q: What are the risks in enrolling in a debt settlement program?
A: Debt settlement is an aggressive strategy. Instead of working with your creditors, as with debt management plans (DMPs), debt settlement has you fighting with your creditors -- sometimes, it's the only thing left to try. But as such, debt settlement does present a host of risks that every consumer should be aware of before embarking on the strategy. They include:
- Damaged credit: By withholding payments and instead sending them to a debt-settlement firm, your credit will be tarnished. Ideally, you will be able to negotiate those "late" marks away, but there is a very distinct possibility that your credit will suffer even if everything else works out perfectly for you.
- Increased collection calls: Once you've missed a few payments in a row, the collection calls will really start to come in. Solution: Change your phone number.
- Tax consequences: Any portion of your debt that's "forgiven" or negotiated away is considered taxable income by the IRS. Beware!
- Potential lawsuits: Debt settlement is an antagonistic approach to ridding yourself of debt, and as such, your creditors have every right to sue you for payment in full. The fact of the matter is, though, it's rarely cost-effective for them to do so. In reality, most threats of lawsuits are hollow scare tactics, but the possibility of landing in court is real.
Q: What do I do if I can't make a payment while I'm in a debt settlement program?
A: Contact your debt settlement administrator immediately. Consult the contract you signed when you joined the program, and see what the procedure is for backing out of the program. There are likely to be fees associated with quitting, so take that into account when choosing a debt settlement program.
Q: What is a debt negotiation and debt arbitration?
A: First, it must be pointed out that there are two definitions of "debt arbitration." The first, and less common, is a legal proceeding, similar to small-claims court, in which a "disinterested expert" hears the case of the debtor and his creditor, and makes a ruling for how they should proceed (i.e. how much the debtor should pay the creditor, and the terms of the payment, etc.)
But "debt arbitration" is also used to describe the process of using a professional debt negotiator -- aka a "debt arbitrator" -- to negotiate an out-of-court settlement. These debt arbitrators are not "disinterested," but instead, they work on behalf of the debtor. In this way, debt negotiation/arbitration is an alternative to bankruptcy or setting up a debt settlement plan.
Q: Will a debt arbitration program really eliminate my debt?
A:First, it depends on what form of "debt arbitration" you're talking about.
The first, but less common, form of debt arbitration is a legal proceeding that takes place when a debtor and his creditor are unable to come to reasonable terms, and yet, for whatever reason, bankruptcy is not a viable option. In this case, an impartial third party (similar to a judge) informally hears the case and renders a decision as to how the debtor and creditor are to proceed. In most states, this process is legally binding, and thus, if the arbitrator decides you should owe nothing, then yes, your debt would be instantly eliminated. But there are two caveats: 1) The arbitrator is unlikely to determine you owe nothing / should be made to pay nothing unless your creditor has been truly egregious in his efforts to collect your debt, or the creditor lacks necessary documentation, etc. 2) In most states, the findings of a debt arbitration hearing can be challenged in a more formal court of law. In other instances, the term "debt arbitration" is essentially a synonym for debt negotiation -- hiring a third-party professional, sometimes a lawyer, to negotiate settlement of your debts with your creditors. In this case, debt arbitration is unlikely to "eliminate" your debt -- in fact, it's impossible. This form of debt arbitration, after all, is a negotiation, and you can't negotiate down to zero. It is possible for a debt arbitrator to reduce your debt by as much as 90% -- if your creditor feels he has no reasonable chance of collecting more and you might declare bankruptcy -- but 50%-60% savings are more common.
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