Quick Answer: Debt settlement does not stop lawsuits, and creditors can still pursue legal action even when consumers are enrolled in settlement programs. New Beginnings and other debt settlement companies cannot prevent creditors from filing court cases, contrary to common consumer assumptions about settlement protection.
Diane wrote to me at the GetOutOfDebt.org site and asked for help with her debt situation. You can write me too if you need help.
Here is what Diane said:
“Dear Steve,
Most money news tells you what happened. I tell you what to do about it.Every weekday I read the enforcement actions, filings and fine print the outlets skip, and turn them into the one or two moves that actually improve your position — a rate worth moving for, a fee you can refuse, a deadline to beat before it costs you.
In the latest issue (Oct 6): When fear picks your debt plan
I write Your Money Actually most weekdays — actionable money information you will not find anywhere else, and the small decisions that compound. It is free, I sell nothing, and I take no money from any company I write about.
I have signed up with New Beginnings to get out of debt. I have paid them for two months so far and have stopped paying on a loan and credit cards. The phone calls are overwhelming and their advice is not to answer. The loan person at a finance company told me they do not accept lump sum offers and if I do not pay may go to court.
Can this happen,what should I do?”
Dear Diane,
I am assuming that the New Beginnings you are talking about is the debt settlement company. I’m a bit concerned that a staff member there told you not to answer the phone. I took a look at the New Beginnings web site and found this question and answer on their FAQ page.
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Q. Are my creditors going to continue to call me?
A. We will determine who and when to contact to give any information and negotiate your accounts. It might be that the individual creditor representative who is calling you is not in the right department to settle any accounts. ALWAYS answer the phone and document the callers’ name, company they are calling from, the last four digits of the account in question, and their call back number on the creditor call log.
Debt settlement companies can provide a valuable service but the biggest problem I’ve seen with then is that consumers don’t seem to fully understand the realities of debt settlement. Debt settlement seems like such a wonderful tool, the prospect of eliminating 60% or more of your debt seems magical to most and once they hear that little fact, the brain stops reading or listening.
The loan company told you that they may take you to court, and they can. If you are paying the debt settlement company instead of the creditor and you are not in compliance with the mutual terms of the loan agreement then the creditor could choose to enforce their rights through the court system. Will they? They could be bluffing, pushing your buttons or just trying to scare you. There is no way to really tell.
There are a couple of other points to know about also when settling debt. As strange as this sounds, the amount of debt forgiven that you do not pay is considered as income by the IRS and you will have to pay income tax on that just as if you earned it.
For example: You owe $10,000 and you settle for $4,000. You will have to pay income tax on the $6,000 of forgiven debt.
The second important point is that a settled debt will appear negatively on your credit report. The portion of your debt forgiven will appear as an unpaid and uncollected debt.
Now, the best use of debt settlement is when you have a lump sum of money, cash in hand, to settle your debts. In this case a plea can be made to accept that lump sum as a full and final payment. Confirmation can be obtained in writing of the deal and the funds immediately transferred to the creditor. Bing, bang, boom, it’s done and over with.
When you are making monthly payments to a debt settlement company your account will continue to flow through the normal collection process. Just because you are working with the debt settlement company does not change your status as a now delinquent debtor.
The debt settlement company wants you to send your payments to them instead of your creditors because they want your accounts to get significantly past due. It is in your best interest for them to go past due if you want to try to settle them. Once it is really past due then the best deals can be had.
The biggest debt settlement client problems occur in the early days. Some are able to take the collection calls, threats, nasty attitude from collectors or face being sued in hopes of settling their debts. Others can’t and pick an alternate path, like bankruptcy.
It might just be that debt settlement is not something that you are emotionally comfortable with and in that case the possibility that you are going to continue to tolerate the types of calls you are getting now, is unlikely.
I would suggest that you look into a debt management plan and speak to a bankruptcy attorney to find out more about what your other options are. The only option that has any control or legal authority over the creditor is bankruptcy.
Before You Sign Anything: Run any debt relief contract through the free Contract Decoder to spot hidden fees and unfair terms. Check the company’s complaint history with the Scam-O-Meter.
Compare Your Real Options: Most debt relief companies won’t tell you about all your options — especially the ones they can’t profit from. Credit counseling has a 21-27% completion rate. Settlement resolves about 1% of enrolled debts fully. Bankruptcy has a 95% discharge rate — and protects your retirement. Take the Find Your Path quiz for a recommendation based on your actual numbers.
