Debt Settlement FAQs: More Important Answers
Q – Are creditors obligated to settle debts?
A – No. What few people realize when they sign up for debt settlement programs is that their creditors are under NO obligation whatsoever to agree to settle their outstanding debts. This means that, even if you have signed up for a program, there are actually no real guarantees that you will be able to settle your debts.
That being stated, however, it’s important to note that, in many cases, creditors can be open to debt settlements, particularly when consumers can pay the settlement amount in full within the near future. The reason for this is that creditors would generally rather be able to get something from debtors, rather than face the possibility of having these debts fully discharged later (and getting nothing for them) due to the consumer filing for bankruptcy.
Q – What are the risks of debt settlement?
A – While we’ve already highlighted some of the risks associated with debt settlement programs (namely that there are no guarantees of settlement and that stopping payment on your debts can create problems), here’s another significant drawback that consumers should be aware of: it’s quite common for consumers who enroll in these programs to never end up completing them because they:
- Can’t afford the ongoing monthly payments
- End up dropping out of these programs.
When this happens, consumers may end up worse off financially than they were prior to enrolling in debt settlement programs (this is usually due to the fact that now they are facing even larger amounts of debt, more damage to their credit, etc.).
Q – What are debt settlement companies required to do?
A – Given that debt settlement companies really cannot guarantee that they will be able to settle your debt, this is a good question. Basically, these companies are required to act fairly and honestly with consumers by:
- Explaining the risks of their programs, including the consequences of stopping payment on debts and cutting off communications with creditors
- Informing consumers that the money they deposit in savings remains theirs
- Providing consumers with “opt out” options.
If debt settlement companies fail to meet these obligations, they can face punitive action at the hands of the Federal Trade Commission (FTC).
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