Blog

Feb
07
Too Good to Be True? The Downside of Settlement Offers in Chicago

Debt collection calls and letters are all too familiar to those experiencing financial problems. While some collectors attempt to intimidate debtors with the specter of a lawsuit, others try a sympathetic approach, playing the role of the debtors’ friends to try and coax them into making payments. The worst part is that the calls don’t stop. Creditors do not have to stop calling when trying to recover a debt that is legitimately owed.

For many people exhausted with the endless barrage of collection notices, the idea of settling with their creditors seems like the quickest way to debt relief. Moving hastily into a debt settlement is not always in the debtors best interest. What people don’t know can hurt them.

Beware of Alluring Settlement Offers

Some creditors are now trying a new tactic. Big banks backing credit cards are now taking proactive measures to try and recover money owed to them. After a few months of missed payments many banks are now sending settlement offers to creditors offering either a zero interest repayment plan or settlement offer for roughly 50 cents on the dollar.

It is important to note, not all banks are offering this, so debtors should not count on it and stop paying their bills and wait for a settlement letter to arrive. These settlement letters may sound like a life raft to many, but there are some important deficiencies with these offers that cannot be overlooked.

First, there is good likelihood that even at zero interest life will show up in some way forcing the debtor to make a choice between paying the zero interest credit card or paying for a crisis item, such as a car repair bill or a medical bill. Statistically most debtors who have fallen behind on payments for a couple of months will be unable to make sustained zero interest payments to credit card companies.

Second, the discounted payoff amounts are not a practical option for most people. If debtors had that kind of money sitting around, they probably would not have fallen behind in the first place. Debtors presented with such offers should resist the temptation to cash in retirement to pay the settlement amount. There are significant tax penalties for cashing out retirement early.

Why are the banks offering these settlements? The banks toss out these offers because the bank would rather recover some money than nothing at all. If they sell a debt to a collection agency, they will only recover pennies on the dollar. If the debtor defaults on the agreement, the banks know they can continue to pursue the debtor for any remaining balance owed.

The Problem With Debt Settlement Companies

Using a debt settlement company to manage credit card debt can also be dangerous. Settlement companies arrange to collect an agreed sum of money on a monthly basis. What many people don’t realize is that these companies typically keep the first few payments that are made as a fee for negotiating the settlement of the debts.

In the interim time between the initial payments to the settlement company and the time when the company actually begins making payments to creditors, the debtor’s credit score may be taking a hit. Creditors will report any missed payments to the credit reporting agencies.

Tax Consequences for Debt Settlement

For those who do reach and complete a settlement agreement, they may find themselves trading one form of debt for another. Any debt that is forgiven, meaning it does not need to be repaid, is still treated as income by the IRS. Depending on the size of the debt, this could result in serious tax consequences and put the debtor right back in a financial pit.

Looking at the Big Picture

If you are looking for debt relief, you should take time to think about how you will make settlement payments, and keep them going until the debt is paid in full. If it will take you more than 14 months to pay off the debt, even at a reduced amount, the settlement may not be in your best interests. It may surprise some people, but bankruptcy can be a quicker path to a fresh start.

Both Chapter 7 and Chapter 13 bankruptcies have advantages that may serve your family better in the long run. Anyone struggling with debts should contact an experienced Chicago bankruptcy attorney to review the implications of bankruptcy and discuss which options may be best.


Convenient Locations

In order to provide convenience for clients throughout Chicago and Northern Illinois, we have offices in the following locations: 

Chicago • Schaumburg  • Oakbrook • St. Charles • Naperville • And More

Locations

We have office locations throughout the Chicago Area:

Chicago (Downtown)

Schaumburg

Oak Brook

Naperville


All calls are routed through our Downtown office for your convenience.

Phone: 312-967-3159

Locations

We have office locations throughout the Chicago Area:

Chicago (Downtown)

Schaumburg

Oak Brook

Naperville


All calls are routed through our Downtown office for your convenience.

Phone: 312-967-3159

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