What is bad debt settlement?
Bad debt settlement is arranged by companies who don’t call themselves debt advisors or debt management agencies, rather they claim that they can clear your credit history or reduce your debts by 60 or 70%. These claims are not quite true so you should be very wary to being taken in by these accelerated debt consolidation companies.
It is true that bad debt settlement companies will administer your debts – if they are legitimate companies – but their exaggerated claims may work in the short-term but long-term, your credit history could be damaged by their actions on your behalf.
It works by simply not paying any of your creditors for at least six months. They of course add charges and fees and you get hassling phone calls and letters. However, after that time has elapsed, the chances are, if the debt isn’t huge, many creditors will ‘charge-off’ your debt. This means that they in effect cancel it as far as they are concerned. They’ve given up trying to get you to pay and with either write off the debt altogether or sell on the debt to a collections agency.
The other thing to watch out for is that any individual debt over $600 that is charged-off is reported to the IRS and counted as your personal income so you may well end up getting a bill saying you owe this tax.
The ultimate problem is that you could end up with big tax bills and a ruined credit file, so be very careful before you decide to use the services of any accelerated debt consolidation company.
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