Debt Relief - Make Sure You Know of All the Pitfalls Before Taking Up Settlement

With the economy in recession, low income levels and high unemployment rates, it is no wonder that the number of people with a high degree of accumulated debt is increasing day by day. People are struggling to make ends meet in the wake of inflation and the burden of repaying debt can sometimes get too much to handle.

While the consumers are debt ridden, the debt relief industry is currently thriving. Debt settlement has emerged as a preferred alternative to filing for bankruptcy and a lot of people seem comfortable to take up the option now that the Federal Trade Commission (FTC) has brought in amendments to the Telemarketing Sales Rule and make settlement more bankable. Debt settlement can help the debtor to lower the debt to less than half of the original debt balance within a short period of time and help them to avoid the long term negative impact that a bankruptcy filing can bring along.

Before you decide to take up the option of using settlement to clear your debts, you need to also understand the downside of the process. The debt settlement process will definitely dip your credit score in the short term. Your debt accounts would have been delinquent for some time and this would definitely affect your credit standing. Also, while the negotiations are being carried out and during the period when you collect the amount to be paid up as a lump sum in an escrow account, your debt will continue to stand delinquent.

The new regulations imposed by the FTC have ensured that the practice followed by settlement companies of charging upfront fees from their clients is put to a stop. However, the fee rates that are being charged by the settlement companies continue to remain high and on an average the companies tend to charge fifteen to eighteen percent of the total debt amount as their fees. Therefore, the amount that the debtor saves from the process is actually quite small. In addition to this, if the debtor saves more than $600 from the debt settlement, the saved amount is treated as taxable income.