Debt Settlement is probably the option that people are most familiar with. Depending on the company and the law, you may pay an upfront fee to the debt settlement company; based on a percentage of your debt. A special purpose savings or 3rd party escrow account will be initiated where monthly deposits are accumulated. When enough funding has accumulated, the debtor is contacted to negotiate or “settle” a debt owed. During this time that the money is being saved, your credit report will be damaged, your scores will drop. There is also a chance of lawsuits and collection company calls coming to your phone and mailbox.
To better protect you against these inevitable consequences, it is important to use a settlement process that is attorney based and does not collect any fees up front. With this method, you stay in control of your money, you approve or deny the settlement(s), and the attorney based companies can help protect you in the event of any lawsuits that may arise. Last but not least, be aware that forgiven debt can equal taxable income. The amount of debt that is forgiven may be treated as income, which means you will have to pay tax on that amount (this can be true to the extent of insolvency). Make sure you work with a reputable firm and your tax advisor in order to be prepared. Feel free to contact us with your questions; the more you know, the better decision you can make.