Things To Look Out For Before You Sign Up For A Pay Day Debt Settlement program
A pay day debt settlement program seems to be an easy solution to those troubled borrowers who are unable to manage and pay off their debts on their own. Though there are certain laws that have been imposed on both federal and state level, the debt settlement industry is still largely unregulated. Though there are some reputable debt settlement companies also in the market, but they are very few. Therefore, you have to be very careful before you sign up with any such company. Make sure you do a thorough background research in advance.
The Difference Between Debt Consolidation And Debt Settlement
To start with, it is very important for you to understand that debt consolidation and debt settlement are two different things altogether. Though there are strict laws to regulate the debt consolidation industry, there are no such laws to regulate the services offered by debt settlement companies.
In case of a debt consolidation, you have to borrow one big low-rate loan so that you can pay off all the existing payday debts. Alternatively, the debt consolidator negotiates low-rate repayment plans for you with your lenders on your behalf and then consolidates all your debts virtually, requiring you to pay a single monthly payment while they will make sure that all your creditors get their respective payments in a timely manner. The debt consolidation company charges a fee for this service.
A pay day debt settlement program, on the other hand, is a different animal. In this case, you are neither issued a new big loan nor are payments made to your creditors instantly. Instead, you are asked to stop all making debt payments and save up cash; when you save a decent amount of money within a couple of months, the debt settlement company will negotiate a lump-sum settlement plan with your payday lenders, where they will be convincing them to accept a reduced amount of payment in full and final settlement of their debts. Stopping the debt payments and waiting for the negotiations to take place can sometimes prove to be very dangerous.
Chances Of Fraud
If you are looking out for a pay day debt settlement program, you will have to be very careful because the debt settlement market is full of fly-by-night scams. There are many unscrupulous companies who make big, highly lucrative promises, charge you a large sum of upfront fee and then disappear. Even if they do not disappear, there is no guarantee that they will succeed in winning a negotiated deal with your creditors in your favor. This way, in either case, you can be a great loss at a time when you can ill afford additional financial troubles.
Increased Chances Of Wage Garnishment And Lawsuits
Industry experts have found that the majority of payday loan companies do not want to work with a debt settlement agency. In fact, some of them are so strict in their approach that they immediately file a civil lawsuit against the borrower claiming for debt payments. It is very important for you to keep in mind that if the debts are real (which means if you legally owe the same), the lawsuits may result in liens on your property or wage garnishment so that the creditors can be paid back. Therefore, before you sign up for a pay day debt settlement program, you are strongly recommended to talk to your creditors first. The chances are that they will welcome a direct one to one negotiation with you, where you can succeed in finding a debt relief solution without needing to hire any third party.
Damage To Credit Score
You very well know how important a role credit score has to play in everyone’s financial life. If you have poor or bad credit, you will end up paying higher insurance premiums, higher utility bills and higher interest on your credit cards, mortgages and other loans. In fact, if you are not a homeowner and live at rented homes, you will even have difficulty in finding an apartment to rent because many landlords these days check credit score of the applicants before accepting them as their tenant. Your credit score gets severely damaged when you do not pay your bills and debts in time. Since most companies that offer a pay day debt settlement program require you to stop debt payments for a several months before a settlement deal can be finalized, it will cause a serious dent on your credit score. In fact, even if you succeed in settling the debts by making a reduced amount of payment, your credit score will drastically go down when the same thing is reported by your payday lenders to the credit bureaus. Therefore, do not forget to ask the debt settlement company about what they will do to protect your credit score.
As per the laws in the United States of America, you are liable to pay taxes on the amount of debt that is waived off by your lenders. For example, if you owe $3000 on multiple payday loan accounts and manage to settle the entire debt by paying back just $2000, you will have to pay taxes on the $1000 that is waived off. IRS treats this amount as a taxable income. If you are in a 25% tax bracket, you will have to pay back $250 as taxes.
Companies offering pay day debt settlement program charge a hefty amount of fee for their services. Their fee may range from 10% to 20% of the total amount of debt they settle. It means you should expect to pay somewhere around $300 to $600 just in terms of service fee for a $3000 of debt. If you add the tax implications, you may find that you end up with no savings at all. In fact, if you are not careful in your calculations, you may end up paying more than you currently owe to your payday lenders.
Last, but not the least, a pay day debt settlement program is not a fast solution. It rarely happens that a company immediately negotiates a fair deal with your creditors and you manage to settle all your debts within a matter of just a month or two. In most cases, you have to keep on making various payments for a very long period of time. Therefore, you are strongly recommended to look at each and every aspect thoroughly in advance before you sign up for any such payday debt relief program.