Common FAQs About Debt Settlement

Below are 10 of the most common questions and answers when discussing debt settlement or debt relief services.

Question 1: Can a Debt Relief or Settlement Company Provide Legal Advice?

Answer 1: Yes if the debt settlement company is a law firm.

Question 2: How Long Does a Debt Settlement/Relief Program Last?

Answer 2: The time needed to produce a settlement depends on a number of factors, but typically most debts are settled and paid off in 12 to 18 months. Various factors that affect how long debt settlement can last include; your financial hardship, the age and balance of unsecured credit accounts, the funds you have available to pay for a settlement, and the willingness of individual creditors to enter into debt settlement negotiations.

Question 3: How much will I be expected to save towards my debt settlement(s)?

Answer 3: It depends on how much money you have available now and how much money you can afford to save each month before you reach the debt settlement amount. You may be eligible to make your settlement in three installments, but it depends on your creditors and the amount of debt you owe.

Question 4: Is the amount I save on my settlement(s) taxable?

Answer 4: Yes. If you save over $600 or more on what you original owed in debt, you are required to pay taxes on that amount, based on your income tax bracket. Some people however, may be excluded from paying taxes on the debt forgiveness, if their assets equal less than the total amount forgiven. It is best to see a CPA or lawyer to understand further about your IRS responsibility for any forgiven debt.

Question 5: What are my responsibilities once I enroll in a debt settlement program?

Answer 5: You are responsible for paying all fees, taxes and the actual amount, of the debt settled. Unlike consumer counseling companies, debt settlement companies do not take or make payments to creditors on your behalf. So your payments need to be paid on time and directly from you.

Question 6: What do the debt relief company's fees cover?

Answer 6: The fees paid to debt relief companies are intended to compensate the company for its work. Debt settlement fees are NOT set aside to help fund debt settlements, that need to be set aside by you the consumer, and the debt relief company is paid separately for their services.

Question 7: What is debt settlement or relief?

Answer 7: Debt settlement or debt relief is a negotiation method or debt reducing service that allows third-parties to negotiate debt, on the consumer's behalf, with creditors. Negotiations are pursued by the third-party in order to reach a mutually agreeable settlement between the consumer and the creditor on the amount of debt owed. Most debt settlement companies can negotiate unsecured debt down to 50% or less of the original owed amount.

Question 8: What is the goal of a debt relief program?

Answer 8: A debt relief program is intended to negotiate a mutually agreeable settlement between the consumer and their unsecured creditor(s). Unfortunately, ever circumstance is different and no specific results can be predicted or guaranteed.

Question 9: When does the debt settlement company communicate with my creditors?

Answer 9: Communications with the creditors are handled on a case-by-case basis.

Question 10: Will all of my creditors and/or third party collectors negotiate with debt settlement/relief companies?

Answer 10: Most of the time yes but debt settlement companies cannot force negotiations or creditors to accept a settlement. Your creditors can and may continue collection efforts on delinquent accounts, even if you are currently enrolled in a debt settlement program. However, most will back off as they would rather collect some of your payments towards your unsecured debt, rather than none, as with bankruptcy.

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