Common questions and other information to help you on your journey to become debt free
Typically, your creditors will close your credit card accounts so no new charges can be made on them. However, some creditors allow you to keep one card for emergencies and travel. Discuss such issues with your creditors when negotiating terms for your Debt Management Plan.
Although enrollment in a hardship program or debt management plan may not affect you credit scores, the closure of your credit card accounts will cause an initial dip in your FICO scores. However, as debts are paid off through the repayment program, the ratios which impact FICO score calculation change for the better and as a result FICO scores will improve.
The length of your debt management plan or hardship program depends on your financial situation and ability. Creditors offer programs that range from a 12 month suspension of interest to repayment programs that range from 3 to 5 years.
Debt settlement is a strategy that can only be used with unsecured debts (credit cards, medical bills, unsecured personal loans). Delinquency on a secured debt will result in forfeiture of the collateral you pledged in order to secure your loan (i.e. mortgage or automobile)
Debt settlement provides the best results when it is treated as an “all in” approach. However it is always a good idea to have one card set aside for emergency situations. Typically the best option is a card with a low balance that you can pay off without settlement. The only caveat is that the card should not be one of multiple credit cards from a particular issuer. For obvious reasons negotiating with creditors will be tough if they see you are settling some accounts but not others.
Creditors will only settle accounts that are severely delinquent. Delinquencies negatively affect credit reports and credit scores. If unsecured debts are not paid off before 180 days delinquency, they are charged off. A charge off is worse than a delinquency. If you are already severely delinquent or your debt has already been charged off, your credit is already been damaged. Remember that your goal is to negotiate and settle your debt for the lowest cost, in the shortest period of time, without declaring bankruptcy.
The Fair Debt Collection Practices Act sets guidelines that collectors must follow. However, it is within their legal right to contact you in an attempt to collect on the debt you owe. We recommend acquiring a free Google Voice number and using it as your preferred contact number for creditors and collectors. Review and respond to your messages appropriately. If collectors violate your rights, file a complaint with the Federal Trade Bureau or Consumer Financial Protection Bureau. Use the recording as evidence to support your claim.
Forgiven debt is considered taxable income by the IRS. You may receive a 1099 form from the creditor or debt buyer you negotiate with for the forgiven debt amount. Promptly provide your tax advisor/preparer the 1099 forms in question. In cases where debtors are found insolvent, IRS form 982 can be filed to exempt you from the 1099 amount.
Yes, your creditors will continue to add interest and late fees onto your balances. Settling accounts quickly keeps them from accruing excessive amounts of interest. Another way to negate the effect of accrued interest is to negotiate aggressive settlements with your creditors and collectors. Example: A $1,000 credit card balance accrues $200 in interest but then the $1,200 balance gets settled for $400.
Creditors and debt buyers reserve the right to sue delinquent debtors in an effort to collect owed money. Settling and paying off delinquent balances as quickly as possible, helps minimize the risk of law suit. We advocate a 24 month or less debt settlement plan to help minimize the risk of lawsuit.
Debt relief strategies are not credit repair programs. However, if you are actively engaged in a debt relief plan, or are considering one to resolve financial issues, you should realize that credit repair also needs to be a part of your overall plan and strategy. The information we provide will help you maximize your credit repair efforts
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