You’ve probably seen ads on TV for free debt relief, debt reduction, and get-out-of-debt-now services. They claim that you can be debt-free in one year or less, or that you can reduce your debt by 50% with one phone call. They make claims that seem too good to be true – and they are. Debt settlement and debt reduction are real options if you’re struggling to make payments, but don’t fall into the trap of debt settlement fraud.
Credit and Default
When you get a credit card or take out a loan, you agree to repay the debt you incur. It’s legally binding and your credit has a right to payment from you. If you miss a payment, you’re in default on the debt and your creditor may start to actively pursue collection. You may receive phone calls and letters from the creditor and the creditor may freeze your account. If you go long enough without paying, your creditor may assign your account to a collection agency or may choose to file suit against you for collection. Once the court grants your creditor a judgment against you, the door is open for repossession, foreclosure, bank levies, and wage garnishment.
In many cases, you’ll be able to avoid these unpleasant consequences by simply reaching out to your creditor. Call and let them know you’re going to miss a payment. Explain what happened to set you behind – maybe a family member fell ill, maybe you had to replace your roof, or maybe you lost your job. Your creditors want you to make your minimum payments on time, but they don’t want to go through the considerable hassle and expense of pursuing you through the legal system. If you default without making contact and they sue, they’ll have little incentive to help you out. If you give them warning and a reasonable explanation, they may be willing to work with you to adjust your payments.
You may be able to negotiate a lump sum settlement. If you have considerable cash on hand, you may be able to pay less than your full balance all at once in full satisfaction of your debt. These lump sum payments will result in tax consequences, so speak to your creditor and, if possible, an attorney about the settlement and any potential tax liability it may create. For example, if a creditor accepts $100,000 as payment on a debt of $175,000, the $75,000 forgiven will be imputed to you as income. You’ll owe the tax man taxes on an additional $75,000 of income.
If you don’t have the cash on hand or your creditor isn’t interested in a lump sum settlement, the creditor may be willing to lower your interest rate. You’ll still owe your full balance, but with a lower interest rate, that balance will grow much more slowly. That can give you the time you need to catch up and get back on track. Credit card interest rates may be as high as 30%, so lowering that rate can make a big difference. When seeking a debt settlement, remember that a debt settlement will show up on your credit report and negatively affect your credit score.
Debt Settlement Companies
Debt settlement companies often take advantage of consumers who are struggling with debt and feel they have nowhere else to turn. These companies offer fantastical promises of balance and rate reduction and debt consolidation such that you end up paying pennies on the dollar. In fact, these sorts of promises are scams. They’re ways to pull consumers in. The debt settlement companies then often recommend that consumers stop making monthly payments and attempt to settle once they’ve saved up a lump sum. Unfortunately, creditors may decide to sue before the consumers have saved up much of anything at all and may not agree to a settlement even if creditors have had time to save. Meanwhile, the debt settlement companies take fat monthly fees from the bank accounts of consumers who are already struggling to pay their bills.
Because consumers pay by the month, debt settlement companies have no incentive to settle debt quickly. They also get their fees whether you get your settlement or not. They don’t have control over the creditors, meaning that creditors may move on to the legal system in an attempt to collect regardless of the consumer’s involvement with a debt settlement company. Altogether, you may end up with a judgment against you for the full amount and less cash than you had before due to the hefty fees the debt settlement companies offer.
Why do people fall for these scams?
Generally, people who are struggling with debt are looking for a way out. For whatever reason, they don’t want to file for bankruptcy but still need to get out from under their debt. Debt settlement companies are smooth talkers. They offer promises of a debt-free life without the credit score damage associated with bankruptcy. They offer the opportunity to pay pennies on the dollar for your debt. They offer to deal with creditors for you, so you don’t have to worry about it. They often cite federal laws or federal bailouts, claiming that creditors are looking or at least willing to settle debts. They draw in consumers with promises and false hope, but really they generally just accelerate consumers’ financial troubles.
Debt Settlement In New Jersey
Recognizing the vulnerability of consumers in debt, New Jersey enacted the Debt Adjustment and Credit Counseling Act to protect them. In New Jersey, only non-profit organizations are permitted to offer debt-adjustment services. N.J.S.A. 17:16G-2. They may only charge 1% of the monthly income of the consumer up to $15 per month to cover the costs of debt adjustment. Attorneys are also forbidden from acting as debt-adjusters unless that is their principal line of business. In other words, the type of debt collection agency described above can’t operate in New Jersey. However, these companies still prey on New Jersey residents through the internet. They’re based in states where the law allows them to operate and debt settlement websites target customers all over the country, including New Jersey, and refer them to those debt settlement agencies.
What are my options?
If you live in New Jersey and you’re struggling with debt, contact your creditor before you do anything else. You may be able to create a payment plan that works for you. If that isn’t the case, then speak to one of the legal non-profit organizations in the state about debt adjustment services. They’re all licensed by the state of New Jersey. If they can’t show you a license, then walk away. If that doesn’t work, either, you still have options.
Bankruptcy Can Help
Bankruptcy isn’t most people’s first choice for debt relief. They perceive a social stigma and they’re afraid of the credit consequences of filing. However, bankruptcy is there to help you reorganize your finances, not to punish you. With bankruptcy, you don’t ask creditors to negotiate, you tell them.
In 2012, more than 1 million Americans filed for bankruptcy. Bankruptcy puts the court between you and your creditors. You’ll get the protection of the automatic stay, which will stop foreclosure, repossession, and legal actions against you. You’ll probably be able to keep your home and your car and you’ll pay pennies on the dollar for your debt – no scams. If you need help with your debts and would like to know more about bankruptcy in New Jersey, check out our other blog posts and reach out to one of our experienced attorneys.
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