Living Frugal
Debt Relief Companies

What are Debt Relief Companies and what do they do?

Otherwise known as Debt Settlement companies, both are basically the same thing offering the same services to their customers. They attempt to negotiate and settle your debts for you.

There are many reasons why you should not use a debt settlement company until you've exhausted all other options on your own. You should try to negotiate and settle credit card debt on your own first.

Lots of debt settlement companies claim they have debt relief programs that can solve your credit card debt problem. There are many that claim they can arrange credit card debt negotiation and your debt settlement will only be a fraction of the debt you owe.

While these companies may have debt relief programs that can help with debt problems, they cannot guarantee you anything. There is nothing that requires a credit card company to accept a partial payment of a debt. Also, it could be months or even years before the debt settlement company is able to negotiate to settle your debts.

Before engaging a debt settlement company's services, make sure you do your research.

They may charge you something called a "debt settlement fee". The "fee" account is administered by a third party who may also charge you a fee. This third party will be the one that pays your creditors and the debt settlement company if settlements happen.

Tips for Working with a Debt Relief Company:

  • You'll be required to open up an account from which your debts will be debited.
  • Make sure that the account is in a FDIC account and that you own and control the money (along with accrued interest) and that you can withdraw your money at any time.

  • The firm you are working with to help negotiate your debts should have no affiliation whatsoever with the third party that administers the funds in the account.

  • Make absolutely certain that you can severe your ties with the debt settlement company at any time without penalty.

  • They should not share fees with the third party firm that has the duty of administering your account.

The debt relief company is required to give you the following information before you enroll in any debt relief program:

  • Fees and Terms of the Debt Relief Program
  • Results; This encompasses the time frame in which the debt settlement company will make offers to your creditors on your behalf. If the Debt Relief Company has no plan to contact your creditors immediately, you should not partner with them for their services or debt relief programs.
  • Non-Payment; The company may encourage you to stop making payments. They must explain the negative impacts of doing so, such as:
  • Negative impacts to your credit score
  • Your creditors can sue you
  • Your creditors can charge you additional late fees and interest; compounding the problem you already have - massive debt

Debt Settlement and the IRS

The money you save in a debt settlement, can be taxed as income.

The company in which you arranged the debt settlement, can report the debt settlement to the IRS. The IRS may consider it as taxable income unless they find you are unable to meet your debts.

A tax professional can help you determine if your financial situation would warrant the IRS to consider your debt settlement as taxable income.

Watch Out for Scams

Don't work with a debt relief company if they do any of the following:

  • Ask for upfront fees before any debt negotiations or settlements. Do not pay a debt relief company any fees before they negotiate and settle your debt.
  • Make guarantees that they can settle your debt. There are no guarantees, period.
  • Advise you to stop making contact with any creditors. This is very bad advice.
  • Guarantee that they will stop all debt collection letters, calls and lawsuits

There are no guarantees. A Debt Relief Company cannot guarantee you anything and they are scam artists if they do.

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