Debt Settlement: What YOU SHOULD KNOW
Debt settlement plans are offered by companies who advertise that they will negotiate an agreement between you and your creditors to settle your debt for less than you owe.
Debt settlement process
The process begins when you enter into a contract with a debt settlement company. You will be instructed to stop making any interest or principal payments directly to your creditors and, instead, make monthly payments to the debt settlement company to build up a lump sum payment in a holding account.
The debt settlement company typically does not contact your creditors to negotiate your settlement until you have built up enough funds in the holding account to cover its fees and to start negotiations with creditors. This usually takes several months of payments. Once the debt settlement company feels there is enough money to start negotiations, it will attempt to negotiate your debt with each of your creditors separately.
Debts that can be included
Unsecured debts (such as credit cards, department store cards, payday loans or other loans) can be included. It is not possible to include secured debt (e.g. car loans, mortgages) in a debt settlement nor is it possible to include income tax debts, student loans and certain other specific unsecured debts.
Warnings about debt settlement services
Although you may stop making payments to creditors, the debts are not settled until the debt settlement company completes its negotiations with each creditor so interest charges will continue to accumulate on your debts. Therefore, any of your creditors can still take legal action by starting lawsuits, seizing assets or garnishing your wages, and collection agencies can still make harassing phone calls. Debt settlement companies have no legal ability to stop them.
If any of your creditors refuse the suggested settlement plan, your debt with that creditor would be excluded from the plan and you will still owe that creditor the full amount of your debt, including accrued interest.
All debt settlement companies receive fees or payment for their services. In some cases, the initial monthly payment you make goes directly to the company as “administrative fees”. Other companies request a lump sum fee upfront, or may take a percentage of each of your monthly payments. Fees vary from province to province, but average fee totals range from $1,500 to over $3,000, depending on your debt level.
Legal alternative to debt settlement