The debt settlement process is stressful. There is no way around that reality. You are often left worrying about your debt for long stretches, hoping for a favorable outcome that provides genuine debt relief. Working with a dedicated debt settlement attorney certainly helps, but we can’t pretend you will not feel immense pressure.
That said, the situation gets much worse when you make common, avoidable mistakes. The last thing you want to do is take a stressful situation and turn it into a stressful and unproductive one. A misstep can cost you time, money, and the positive result you are working so hard to achieve.
Here are five common and yet very important mistakes to avoid during the debt settlement process.
Continuing to Talk to Creditors and Debt Collectors on Your Own After You Have Hired a Law Firm to Represent You
Once you have legal representation, your lawyer should be the only one communicating with your creditors. It’s as simple as that. When a creditor or a collection agency calls, your only job is to inform them you are represented by McCarthy Law and provide our contact information. Then you hang up.
Taking these calls yourself is a significant mistake. Creditors are trained negotiators whose goal is to get as much money from you as possible. They might use confusing language or pressure you into agreeing to a payment plan that undermines our settlement strategy. Any conversation you have can be used against you, so letting us handle all communication protects you and the process.
Failing to Consistently Save Money or Stick to a Strict Budget for the Settlement Funds
Debt settlement works because you are able to offer a creditor a lump-sum payment to resolve your debt. That money has to come from somewhere. The strategy requires you to stop making your regular monthly payment to the creditor and instead deposit that money into a separate, dedicated savings account. This is your settlement fund.
The mistake happens when life gets in the way, and you start dipping into that fund. A car repair, a vacation, a shopping spree — using that money for anything other than its intended purpose sabotages our ability to negotiate for you. You have to know everything about your debt, because when a creditor is finally ready to settle, the money has to be there. Without it, the deal may be lost. A consistent budget is the engine that makes your debt settlement possible.
Not Having a Plan to Deal With the Impact on Your Credit Score
Debt settlement is a powerful tool, but it is a process that comes with a few things to navigate as well. To get a creditor to the negotiating table, you typically have to stop paying them. This means your accounts will go delinquent. Your creditor will report these missed payments, and your credit history and score will take a hit.
This is a planned, temporary consequence. The goal is to eliminate a large portion of your unsecured debt, like high-interest credit card debt, so you can rebuild your financial life on solid ground. Your credit score can be repaired over time, but crushing debt can last a lifetime. You are exchanging a short-term negative mark on your credit history for long-term financial freedom.
What that means for your immediate future is that you may not have the credit score to make major purchases. But don’t worry. Getting out of that debt is a major step, and it’s something you shouldn’t take lightly. Using that time while your credit score is a bit lower to practice good habits and get yourself in a good financial position can help you reap the rewards when it’s ready to buy a house or car.
Not Setting Aside Money to Pay the Potential Taxes on the Forgiven Debt Amount Your Creditor Writes Off
This is a mistake that can lead to a very unpleasant surprise. When you settle a debt for less than the full amount owed, the creditor writes off the remaining balance. For example, if you settle a $10,000 credit card debt for $4,000, the creditor “forgives” $6,000. The IRS may view the forgiven $6,000 as taxable income.
The creditor will likely send you and the IRS a Form 1099-C, “Cancellation of Debt.” If you are not prepared, you could trade a debt problem with a bank for a tax problem with the government. We can advise you on potential tax consequences and insolvency exceptions, but it is on you to plan for a potential tax bill on the money you saved.
Want to Avoid Debt Settlement Mistakes? Call McCarthy Law
Mistakes can completely derail the debt settlement process, turning an opportunity for a fresh start into a financial dead end. But the reverse is also true. Making informed choices backed by sound legal guidance can lead to a successful outcome that lifts a heavy burden from your shoulders.
To minimize costly errors and move forward with your debt settlement, call our team at McCarthy Law. Our lawyers in offices across the nation combine their legal knowledge and practical experience to bring you effective debt settlement support throughout the entire process. Contact us today to learn more.