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Debt Settlement, Debt Consolidation and Bankruptcy Alternatives
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 Frequently Asked Questions |
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- How will debt settlement affect my credit?
- How does debt settlement compare to bankruptcy?
- Does Debt Settlement America keep my information confidential?
- What is the difference between unsecured debt and secured debt?
- Will I continue to get calls and collection letters from my creditors?
- Will fees and interest continue to accrue?
- Will your program stop legal action against me?
- Will I owe money to the IRS for my reduced settlement?
- Who controls my personal savings used for settlement?
- So what does the program cost and how do you get paid?
- Who Pays my Creditors?
Question: How does the program work?
Answer: Many people cannot afford to make monthly minimums payments towards their credit card debt with high interest rates. It could take 30 - 40 years to pay off the debt. Others have had a decrease in income, suffered a disability, or lost a job and are likely already behind on payments or cannot afford to stay current due to a financial hardship. Our IAPDA certified debt negotiators will negotiate with your creditors on your behalf, not on your creditor's behalf, as is the case with credit counseling. DSA gives you an alternative to bankruptcy and a solution to your unmanageably increasing debt due to high interest rates. So how does settlement work?
- DSA designs an affordable monthly savings plan put together for you and your savings are used to obtain settlements with your creditors.
- The settlement process in our program typically takes about 36 months or less. DSA has assembled an impressive team of dedicated individuals who work with one common goal… to save you money.
- As a new client, DSA will educate YOU on how to handle creditor calls and communications. DSA will contact creditors when it is an appropriate time and strive to get the best settlement for you.
- Our expert certified debt negotiators are paid bonuses based upon lower settlement percentages. That means the better settlement they make for you, the more compensation they receive. This ensures the settlement team is working directly for YOU and not the creditors. As a result, the absolute best settlement deals are achieved with your best interest in mind.
- We believe in a win-win relationship. As always, getting you out of debt is our job… keeping you out is our mission.
Question: Who is an ideal candidate for Debt Settlement?
Answer:
- Someone who has some type of hardship such as (illness, disability, divorce, job loss, or a reduction in pay) and is having difficulty making payments on their credit card debt.
- Someone who has past due credit card debt in excess of $15,000, with high interest rates and unsustainable payments such that the individual is considering filing bankruptcy.
- Someone with a debt problem that he or she cannot resolve.
- Someone who is having trouble staying current and is delinquent on their accounts or is receiving collection calls or is close to having suit for a judgment filed against them.
- Someone considering bankruptcy, but would like to avoid it.
Is debt settlement the same as debt consolidation?
Answer: No. The goal of debt settlement is to reduce the overall amount of the debt by negotiating agreed payoff amounts with your creditors. Debt consolidation requires you to take a loan to pay off your unsecured debt with secured debt.
Debt Consolidation loans transfer the debt from one account to another and typically takes unsecured debt(s) and changes it into secured debt (usually your home). If you do not have enough equity (typically 25 - 30% LTV), bad credit, or too much debt, it is not likely that you will be approved for a debt consolidation loan.
Statistics show that about 70% of people who obtain a debt consolidation loan find themselves in deeper debt than they were originally in within a two year period. You cannot borrow your way out of debt. Ask yourself why you would want to go from an unsecured loan to a secured loan to be paid over a longer period of time?
The main problem with consolidation loans is that once you have paid off the credit cards you have a whole new source of spending power: $0 Balance credit cards. Many people lack the discipline to avoid incurring any more credit card debt, leaving them in a worse financial situation. You end up not only having to pay back the cards but also the consolidation loan.
If you start missing payments on the consolidation loan, you stand to lose the asset (usually your home) that the loan is secured against.
Question: Is Debt Settlement the same as Consumer Credit Counseling?
Answer: No. Debt settlement does not work like consumer credit counseling in most respects. The goal of debt settlement is to reduce the overall amount of the debt, by negotiating payoff amounts with your creditors. Debt Settlement can save you thousands of dollars and years of repayment.
Many Consumer Credit Counseling Companies tout their non-profit status. Many consumers confuse "non-profit" with "no charge for services", or charity. Non-profit Consumer Credit Counseling Companies may still make substantial amounts of money. The way Credit Counseling works is that you typically meet with a Credit Counselor who analyzes your unsecured debts, other obligations, and your monthly income. A credit counselor then formulates a monthly budget and presents a plan that includes lowering of some credit card interest rates and sometimes, the monthly payment typically around 16% interest. The Credit Counseling Company then contacts all your unsecured debt Creditors and requests that the consumer be permitted to repay the debt at a lower interest rate. During the program a single monthly payment is sent to the Credit Counseling company and they in turn make payments directly to all your creditors for the next 48 - 72 months.
Consumer credit counselor charges what seems like a relatively small fee but over time it adds up to costing you more than a debt settlement program.. What you are not told is that the Credit Counseling companies act as a surrogate of the Credit Card Company. They make most of their money from "donations" from your Creditors based on the amount they "collect" from you while in the program. This is an arrangement very similar to the way collection agencies are paid by creditors. Since credit counseling companies rely on payments from the credit card companies, they do not truly represent the consumer. However, there are good credit counseling companies out there and credit counseling may be the right option for you if you do not have a true financial hardship -- research them carefully to make sure their services make sense for and that you can afford to make payments under the credit counseling program.
The downside to credit counseling is as follows:
- In a Credit Counseling program you pay the full amount of debt owed and sometimes the interest rate is lowered only nominally or not at all on average 16%.
- Credit counselors don't always make timely payments resulting in late fees and a derogatory credit history.
- Not all Creditors agree to reduce your interest.
- Payments are still high and it typically takes 5 or 6 years to pay off the debt.
- In order to pay off your debt in full, credit counseling monthly payments are usually equal to or greater than the minimum payments you were making on your credit cards.
- Most Credit Counseling programs have a high failure rate. Their own industry estimates approximate a 21 - 26% completion rate.
- Many of these companies are funded by your creditors - the very people to whom you owe money - and thus, they must demonstrate some loyalty to the creditors.
- Despite claims otherwise, credit counseling may appear on your credit record. This is viewed negatively by most lenders and may hinder your ability to refinance a home or get a loan.
Question: Can you settle your debt on your own?
Answer: Yes, however, designing plans and settling debt is all Debt Settlement America does. You may be able to make your own plumbing repairs or install your own computer network, but most people don't have the time or expertise to deal with it.
Creditors deal with thousands of people who are in financial difficulty every day and have a vast array of sophisticated (and some rather blunt) methods of intimidating you into financial arrangements you cannot keep.
The settlement process is usually very emotional and stressful, especially when you are the one being attacked by collectors over the phone. Most people prefer to leave these tasks to experienced people who earn their livelihood doing that particular kind of work.
We have a staff of debt negotiators whose only job is to negotiate the settlement of unsecured debt, every day, five days a week. By letting DSA do what we do best, you will get better settlements.
DSA knows how to deal with creditors and has in-depth knowledge about how these institutions work. We can potentially save you thousands of dollars and free you from a considerable amount of stress.
Question: How long does the debt settlement program take?
Answer: The time to complete the debt settlement program varies from case to case and is primarily based upon how much money you will be able to set aside each month to eliminate the debt of your enrolled accounts. During your initial free consultation, the time to complete the debt settlement program for your individual case will be discussed with you by our Debt Consultant. DSA's average client plan is 36 months. The amount of time it takes to clear your debts is largely dependent on your current financial situation. If your budget is extremely limited results may take longer. Every situation is different and we will be happy to discuss this during your free confidential phone consultation.
Question: How will debt settlement affect my credit?
Answer: A debt settlement program will have a negative effect on your credit while in the program. If your accounts are already delinquent it may not have much effect. For consumers with unpaid delinquent accounts this makes debt settlement an excellent option over ignoring the delinquent past due account, considering the savings versus paying the past due account in full. The question is, does debt settlement make sense for those who have current accounts, and a good credit rating. Those with a high credit score must weigh the negative impact on credit ratings against the risk of bankruptcy and the potential of being out of debt for less than the full balance. Note: even if your accounts are current your credit score may already be negatively impacted by your total debt and debt to available credit ratio; in this case negotiation of the accounts may still be a better alternative than making minimum monthly payments for the next 30 years and still having bad credit.
While in a debt settlement program, you will receive late marks on your credit as you are not making regular payments to your creditors. Your consumer credit score will be negatively affected during the delinquency period. This occurs for two reasons. First the account is late and is continually reported to credit bureau as the delinquency period extends (60, 90, 120 days). Secondly, the amount listed in the payment due column increases as past due payments stack up. If the accounts are current but the credit score is low due to high balances or a history of late payments, the negative effect on your credit may already be reflected in your credit score.
Once your account balance and payment due is settled and reported as a zero balance, your debt to income ratio will be reduced as long as you have not since incurred more debt. Low debt to income ratios typically have a positive impact on accounts and credit, particularly over the long-term. The history of the delinquency may remain on your credit report, but the account moves from the current derogatory reporting section of the credit report, to the closed account section. As months pass any derogatory history has less and less bearing on the credit score. Some lenders believe that after 12 months the accounts are given very little consideration. It appears that provided all other debts are paid in a timely manner (house, car, and other accounts kept current) the effects of the settlement process are temporary. However, debt settlement should not be used as a method of credit repair. Remember if you are considering chapter 7 or 13 bankruptcy it will stay on your report for 10 years.
Question: How does debt settlement compare to bankruptcy?
Answer: Filing for bankruptcy has many negative implications, and is usually considered only as a last resort. Bankruptcy may seem to be the quickest solution to removing your outstanding debt but even bankruptcy attorneys will tell you it will remain on your credit for 10 years.
Both Chapter 7 and Chapter 13 will represent a major negative mark on your credit rating. In Chapter 7 bankruptcy it will stay on your report for 10 years and chapter 13 bankruptcy stays on your report during the time you are in the bankruptcy program plus a specified time calculated from the date you complete the program.
- Bankruptcy can cost up to $2,500 to file plus additional attorney's fees. Additionally in Chapter 13 there is a 5% trustee fee for the administration of your chapter 13 bankruptcy.
- Chapter 13 bankruptcy the court decides what you can pay and what your budget is.
- Bankruptcy may affect your ability to get a job if you work in security or financial services or have duties involving financial information.
- Bankruptcy will likely result in higher interest rates on future loans and credit.
- Bankruptcy carries a negative stigma, mental stress, and other burdens.
- Chapter 7 bankruptcy is more difficult to qualify for since the change in laws in 2005.
- Filing for Chapter 7 bankruptcy does not mean you will qualify for Chapter 7. If you fail to qualify, you will be referred to Chapter 13 bankruptcy.
- If you do qualify for Chapter 7 bankruptcy, however, your debts may be completely discharged.
Besides being a devastating hit to your credit, bankruptcy can also potentially affect current and future employment opportunities for financial and security related jobs. Additionally, Home lenders are now asking on loan applications, "Have you ever filed for bankruptcy?" Even if the bankruptcy has fallen off your credit report, answering "No" is considered a federal offense if you have ever filed for bankruptcy. Thus bankruptcy will follow you for the rest of your life. Bankruptcy is a permanent decision that is usually considered as the last resort to solving your debt matters. If you decide to file for bankruptcy, first seek the advice of a licensed attorney. If you have enough discretionary income and wish to work on resolving your debt over time, our Debt Settlement Program may be a better alternative.
Question: Does Debt Settlement America keep my information confidential?
Answer: Yes. Debt Settlement America maintains your confidentiality at all times. We only disclose information to those persons that you have authorized. All creditors that you have contracted us to settle with on your behalf will be contacted by us and advised that you have retained Debt Settlement America to represent you. All information is considered highly confidential and personal. Please see our Privacy Notice.
Question: What is the difference between unsecured debt and secured debt?
Answer:
Unsecured debt is any loan or debt that has no tangible assets or property attached to it. The most common types of unsecured debt are credit cards, department store cards, medical bills, utility bills, and personal loans. Should you fail to make timely payments, the lenders only recourse is to pursue legal action.
Secured debt is debt for which the creditor has collateral in the form of a security interest in personal and/or real property. Should you fail to make timely payments on secured debt, the creditor is entitled to repossess the property and sell it. Please keep in mind that you may still be liable for any deficient balance remaining after the sale of the property. When dealing with secured debt, it is important to obtain advice from a licensed attorney in order to protect your interests.
Question: Will I continue to get calls and collection letters from my creditors?
Answer: Most likely, yes. Most original creditors are cooperative. Calls may reduce after the original creditor receives a hardship letter from you.. It is important that you review the section on how to handle creditor calls in the program kit you receive as a new client to minimize creditor harassments Consumers have rights against abusive collection tactics.
See your rights under the Fair Debt Collection Practices Act & Debt Collection Laws for your State.
Question: Will fees and interest continue to accrue?
Answer: Most creditors will continue to charge fees and interest until the account is written off (typically 120 - 210 days) although it may be longer.
Question: Will your program stop legal action against me?
Answer: No - creditors have the right to use legal means to collect a debt. Some creditors are more likely to file suit than others.
In our experience, a small minority of consumers are involved in lawsuits. However, it is a common tactic of third-party creditors or collection agencies to threaten you with a lawsuit (which is illegal if they do not intend to sue). Third-party creditors or collection agencies sue less frequently than original creditors. While we cannot guarantee that legal action will not be taken, we are confident that our experience in dealing with creditors can reduce the possibility of this happening.
Despite any legal action that may or may not be taken, your account can be settled before, during or after the suit. Just because an account goes to legal action does not mean that we cannot settle it. The threat of legal action can be the scariest of all. IT CAN BE HANDLED. Sometimes a single lawsuit is not a bad thing because it may give our negotiators leverage to settle your other accounts. We recommend that our clients seek competent legal counsel in certain situations.
Note: We cannot provide you with legal advice. However, we work with your creditors in an attempt to make a settlement even when legal action is pending.
Question: Will I owe money to the IRS for my reduced settlement?
Answer: Original Creditors are required to report canceled debts exceeding $600 to the IRS and you are supposed to report the same as income on your annual tax return. However, the IRS permits you to write off any "income" from canceled debts up to the amount by which you were "Insolvent" at the time. Therefore, unless you have a positive net worth, then you ordinarily will not be obligated to pay taxes on the forgiven amounts. Additionally, if you do not qualify as insolvent non principal amounts such as fees accumulated on the account may be deducted from the amount reported. Refer to: www.IRS.gov Publication 908.
Note: You should consult a tax advisor for advice specific to your situation. This should not be considered tax advice.
Question: Who controls my personal savings used for settlement?
Answer: While DSA may recommend a bank that helps protect your money, your personal savings account is a bank account that you control. This account remains your property and under your control. DSA will contact you monthly to ensure that you are depositing the minimum program savings amount as set out in your settlement program. When you have accumulated enough funds in your account our debt negotiators will begin the negotiations process with your creditors.
Question: So what does the program cost and how do you get paid?
Answer: Our fees are very competitive, are based on a percentage of your overall debt, and consist of an enrollment fee and a service fee. We earn our enrollment fee as follows: when we perform a budget review, analysis of your accounts, and file setup; when we have prepared initial correspondence for the client to send to the contracted creditors directly, and when we send the program kit to the clients. The service fee is earned as we engage creditors for settlement, handle creditor calls and communication, negotiate a settlement of your contracted accounts and administer the settlement and funding arrangements. If Debt Settlement America is unable to settle an enrolled account, DSA will refund back to you, an amount equal to the service fee collected on that particular account based on the balance at initial enrollment.
Question: Who pays my Creditors?
Answer: Debt Settlement America DOES NOT disburse funds to your creditors during the program. The purpose of our debt settlement program is to create a savings plan for you and negotiate settlements on the balances you owe. Those in a debt settlement program, are financially unable to make regular payments to creditors and instead set aside money in savings to pay a settlement once negotiated. If you can afford to keep paying off your debts on your own, you should do so. Under the debt settlement program, once you approve a negotiated settlement offer, you will then make the payment directly to your creditors from your personal savings account. Once the payment has been made the account will now be considered settled in full.
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