Debt Repayment: Debt Settlement Programs
If you go out on the Internet looking for DEBT REPAYMENT info, you need to know that there are only two basic kinds of programs and that they are for unsecured debts. There’s a lot of confusion about them because some agencies purposely misrepresent the service they’re offering. Sometimes that withhold important information you need to know. Both kinds of programs are often called DEBT CONSOLIDATION but they are NOT for the same situations. You need to know the difference.
Make A Way Ministries recommends both of them but ONLY for their respective situations. Let’s start with their CORRECT names:
DEBT MANAGEMENT PROGRAMS
DEBT SETTLEMENT PROGRAMS
A Debt Settlement Program is the second main option for debt repayment and it’s for consumers whose accounts have already reached COLLECTION OR CHARGE OFF status. The attraction is that most Creditors are open to the settlement of such debts for less than their outstanding balances. But you need to know that creditors will NOT make meaningful Debt Settlement discounts before your account has deteriorated to a COLLECTION status which will ALREADY be reflected in your credit reports.
The first problem you’ll encounter on the Internet is that some of the agencies specializing in this service are erroneously and unethically calling it Debt Consolidation. Debt Settlement is NOT a Debt Consolidation Program in the traditional language of the credit counseling industry and the informed consumer needs to clarify this at the outsight of their research. Many consumers have thought they were enrolling in a creditor-sponsored DMP only to find out later they were actually involved in a Debt Settlement Program and that as a result their credit ratings were destroyed.
If you’re still sending on-time monthly payments to your creditors, the Debt Settlement agency will have to tell you to stop paying the creditors and to send those monthly payments to their agency. The objective is to drive your accounts into COLLECTION so you can qualify for the discounts. But those agencies often fail to clearly inform consumers that their credit ratings will be destroyed while they’re not sending their payment to their creditors. And they also often fail to advise consumers that those creditors may bring law suits against them while they’re waiting for those promised discounts. If your accounts are already in COLLECTION, then you have less to lose and a Debt Settlement Program might very well be the best strategy for you.
Another thing the Debt Settlement agencies may fail to fully inform you about is that the difference between your outstanding balance of record on one of your debts and the amount they settle it for will be construed by IRS as imputed income. It will be subject to taxation as ordinary income on your next tax return if the savings was greater than $600.00. Most creditors will issue IRS Form 1099 for this purpose and you will be responsible to account for it on your tax return.
Another thing to pay close attention to is how much the agency is actually charging you for the Debt Settlement service. They may have a low “enrollment fee” but in addition they’ll be applying most or all of your monthly payments during the first year to themselves as a RETAINER FOR EDUCATIONAL SERVICE. If you’re not paying attention, you could wind up paying several thousand dollars for the program BEFORE the agency has ever done any work on your behalf which technically is against the intent of federal legislation governing this sector of the credit counseling industry. For the time being, these agencies have found a way around federal law by restructuring their Counseling Agreements so be on the lookout.
In sum, Debt Settlements can be a good repayment strategy for some folks but there’s still a lot of abuse on the Internet. Many of the agencies that offer this service are large For-Profit Businesses that are NOT really all that interested in helping consumers but VERY interested in taking their money. You MUST be informed or you can easily be taken advantage of.
Our special publication covers both types of Debt Repayment Programs: Debt Management and Debt Settlement. Achieving Financial Victory requires that we become informed about our finances. From cover to cover the Bible is trying to teach us how to become good financial stewards. The Bible will help you establish basic values and principles and publications such as the following will help you find the correct interface between biblical stewardship and the world’s financial system.
Debt Smashdown: Repayment Strategies that Succeed
If you need professional help with a Debt Settlement Program, we can refer you to an honest and reputable Christian organization. Please click on the following link:
You can also download the following FREE publication so you can be more fully informed.
Just click on the link and download it to your device: