There was a time when carrying a debt into retirement was considered taboo. Today, times have changed. Rising costs of living, longer life spans, and the financial pinch felt by most people means that a growing number of people are entering retirement with an existing debt. This is true not just for retirees, a large number of people find themselves with large debts looming over their heads, and without a clue of how to repay it. Credit debt settlement is a way that some people turn for settling their debts and avoiding bankruptcy. Let’s look at how credit debt settlement works.
Credit debt settlement is not the same as debt consolidation, where a single larger loan is offered in the place of numerous smaller loans. In debt consolidation, financial counseling is also available to borrowers, where a low interest debt repayment plan can be set up so borrowers can deal with their consolidated debt over a period of time.
Credit debt settlement is a different thing altogether. Credit debt settlement companies offer the service of negotiating lump sum payments with lenders instead of loan repayment in installments. A credit debt settlement company, therefore, does not counsel borrowers on how to repay the loan, but instead encourages them to save money.
The money saved by the borrower is then used to pay-off the lenders, once the credit debt settlement company has reached an agreement with the lender on your behalf. This essentially means that by using a credit debt settlement agency, a borrower may be able to settle their loan by way of a much smaller lump sum than the actual loan amount.
While this sounds like a very good way to settle an unmanageable debt, and for some people it may work too, there are risks involved in using a credit debt settlement agency to settle your debts. For one, this is not a strongly regulated industry. This means that there is much scope for fraudulent operations by companies offering to settle your debts, but leaving you in a worse-off position in the end.
Credit debt settlement agencies generally charge large fees for their services. Many companies may charge between 14%-18% of the total amount owed. Some companies charge a large proportion of the money saved by you by way of fees. Whatever method the credit debt settlement company uses to charge fees, the amount usually works out so that the total amount you pay is less than the debt itself, which is why some people still find it worth the trouble.
Nonetheless the fees are exorbitant. While saving money by settling with a smaller amount may sound like a great deal, the money saved is usually taxable. So even if you do end up ‘saving’ some money, you will be liable to pay tax on the money saved. If you have losses to offset the amount saved then you may be exempt from paying tax.
An important disadvantage of defaulting on a debt is to damage your credit score. A poor credit history negatively impacts on the chances of procuring credit in the future among other adverse effects. Late payments also impact on the credit score; and settling a debt for a smaller amount can have a much more severe impact on credit rating. Credit debt settlement may be marketed as a quick way to settle debts for a smaller amount, but in reality the process of settling the debt can be far from quick. The process can ramble on for months.
Credit debt settlement may have a lot of risks associated with it, but it does seem to attract some borrowers with a looming debt to repay on one hand, and the possibility of bankruptcy on another. If you are considering credit debt settlement, it is advisable to seek the help of a professional financial adviser, with expertise in the field of bankruptcy and debt settlement.
There are quite a few companies offering credit debt settlement out there, and it is important to choose carefully. A financial adviser or attorney can help you understand the pros and cons of credit debt settlement in the context of your own circumstances, and select the right credit debt settlement agency.