Debt Settlement Frequently Asked Questions
Debt Relief FAQ
Q: What is considered debt?
A debt is something, usually money, that is owed by an individual or business, known as the borrower or debtor, to a second party, known as the lender or creditor. This includes debts owed on credit cards, home loans, car loans, student loans, medical bills, or any other debts owed to a lender.
Q: Am I considered a debtor?
A debtor is any person who has credit card debt, makes payments on a mortgage loan, or owes money on a personal loan.
Q: What is debt collection?
Debt collection is the process of pursuing payments for unpaid debts owed by individuals or businesses.
Q: What is a debt collector?
If you fall behind on your payments, a creditor may attempt to collect payment from you itself, or it may send your account to a third-party debt collector or collection agency, which is a company that collects unpaid debts for others.
Q: How does the Fair Debt Collection Practices Act apply to me?
The Fair Debt Collection Practices Act (FDCPA) is a law that protects consumers from the unfair, abusive, intimidating or deceptive practices creditors or debt collectors sometimes use when collecting debts.
Q: What is debt relief?
Debt relief is any reorganization of debt with the intent to provide the debtor with some measure of relief.
Q: What is a debt settlement?
Debt settlement, also known as debt negotiation or debt resolution, is a process by which a debtor is able to erase his or her debts without paying the full amount owed.
Q: How does debt settlement work?
The goal of debt settlement is to settle, or resolve, your unpaid debt by making a lump sum payment to your creditor, usually for less than the balance due on the loan. Debt settlement is a negotiated agreement in which a creditor agrees to accept less than the full amount owed by the debtor.
Q: What types of debt can I settle?
Credit card debt and medical bills tend to be the easiest types of debt to settle, because if you decide to file for bankruptcy and the debt is discharged, the credit card company or medical facility could end up getting nothing. In fact, most types of unsecured debt can be settled.
Q: What is unsecured debt?
Unsecured debt is any debt not attached to an underlying asset. Some of the most common types of unsecured debt consumers end up trying to settle are medical bills, credit card debt, utility bills and other types of credit or loans that were obtained without collateral.
Q: What is secured debt?
Secured debt is debt secured by an asset, such as a house or car. If you take out a mortgage loan, the loan is secured with your home as collateral, and if you default on the loan, the lender can seize your home, sell it and use the proceeds from the sale to repay the debt owed.
Q: What is credit card debt settlement?
Credit card debt settlement is the process of negotiating a settlement with the credit card company or its debt collector to resolve credit card debt that you can’t afford to pay back.
Q: Do I have to include all of my credit cards in the debt settlement?
If you have one credit card that you carry a low balance on, you may decide to hold on to that card for emergencies, so long as you can quickly pay the balance down to zero. Otherwise, you should consider including all of your higher balance credit card accounts when settling your debts with creditors.
Q: What is second mortgage settlement?
When you take out a second mortgage on your home, you are essentially borrowing the equity you have in your home, and if you aren’t able to make your second mortgage payments, you could lose your home. If you fall behind on your second mortgage payments, you may be able to negotiate a settlement with the junior lien holder for less than you owe on the loan.
Q: What happens if I don’t settle my second mortgage?
If you fall behind on your second mortgage payments and you don’t settle the debt or otherwise resolve the debt, you risk the junior lien holder foreclosing on your home.
Q: What is foreclosure?
Foreclosure is a legal process in which a mortgage lender, or lien holder, forces the sale of a property in an attempt to recover the outstanding balance on a mortgage loan from a borrower who has stopped making payments.
Q: Can debt settlement stop a foreclosure?
Mortgage lenders, especially second mortgage lenders, generally prefer not to foreclose on property, because foreclosure is an expensive and time-consuming process and they aren’t guaranteed to get their money back. If the property in question is underwater, meaning more is owed on the loan than the current market value of the property, and there is a second mortgage on the property, the junior lien holder would have to pay off the senior lien holder first in the event of foreclosure, in which case the junior lien holder would likely get nothing. If you fall behind on your second mortgage payments, you may be able to avoid foreclosure by attempting to negotiate a second mortgage settlement.
Q: What is a charged-off second mortgage?
If your first mortgage lender forecloses on your home and you are no longer making payments on your second mortgage, the lender may “charge off” the debt, or write the debt off as a loss. Unfortunately, even if your second mortgage is charged off, your lender still has the right to collect the debt and may send or sell your account to a collection agency.
Q: Can I settle debt resulting from a charged-off second mortgage?
If you can’t afford the monthly payments and don’t have enough money to pay off the total amount of the debt you owe on your second mortgage, you may be able to negotiate a settlement for less than you owe, and a debt settlement attorney can help guide you through this process.
Q: What is a home equity loan?
Second mortgages, home equity loans and home equity lines of credit (HELOCs) are some common methods homeowners in Los Angeles use to pay off their unsecured debt. When you take out a home equity loan to pay off credit card debt, you use your home as collateral and the unsecured debt (credit card debt) becomes secured debt (a second mortgage).
Q: What is tax settlement?
If you don’t have the income or assets to pay the taxes you owe to the IRS and you are experiencing a financial hardship, you may be eligible for an Offer in Compromise, or tax settlement, in which the IRS agrees to accept less than the amount you owe in back taxes.
Q: What types of debt are not eligible for settlement?
Much like the debts that are not dischargeable in bankruptcy, there are certain debts that typically don’t qualify for debt settlement, including child support, alimony and student loans.
Q: What does it mean to default on a loan?
When you take out a mortgage loan or sign up for a credit card, you are legally obligated to pay back the money you borrowed, and when you miss a payment on your mortgage loan or credit card, you have defaulted, or failed to pay back the debt according to the initial loan agreement.
Q: Is the creditor legally obligated to accept the settlement?
Creditors have no legal obligation to settle an outstanding balance on a loan. It is up to them to accept your debt settlement proposal or not, and many creditors will take their time negotiating, or, if they don’t agree with the terms, deny the settlement altogether.
Q: What if my creditors don’t agree to settle?
Our debt relief attorneys have successfully negotiated with creditors all over the country and it is rare that a creditor won’t agree to any kind of settlement, especially if you can show a financial hardship. By hiring an experienced debt relief attorney, you can improve your chances of successfully settling the debts you owe.
Q: How much could debt settlement save?
In many cases, debtors who successfully settle their debts with creditors end up paying only a small percentage of what they originally owed on the loan, possibly as little as 50% of the total balance due.
Q: Is bankruptcy an option?
If you qualify for a Chapter 7, Chapter 13 or Chapter 11 bankruptcy filing in Los Angeles, you can get the protection of the automatic stay, which puts a stop to creditor calls, debt collection lawsuits, repossession, foreclosure and other collection actions. There is a certain social stigma associated with bankruptcy and many people are afraid that a bankruptcy filing will ruin their reputation and their credit and force them to give up their personal property. However, bankruptcy is an honest and reasonable way to deal with overwhelming debt, and most people who file for bankruptcy in Los Angeles are able to keep their home, car and other important assets.
Q: Is debt settlement better than filing for bankruptcy?
For many people struggling with overwhelming debt, bankruptcy is the fastest and easiest route to long-term debt relief. However, bankruptcy isn’t right for everyone, and there are many alternatives to bankruptcy that may work better for some people, including debt settlement, which doesn’t carry the stigma of bankruptcy.
Q: How long does debt settlement take?
The debt settlement process varies from person to person and the amount of time it takes to successfully settle your debts will depend a great deal on how far behind on your payments you are, the creditors you are dealing with and how easily you are able to negotiate with them. Initiating the debt settlement process can take a single phone call. The average amount of time it takes to complete a debt settlement program is two to four years, but for some people, debt settlement can be a longer process, as it requires them to accumulate enough money to make the required lump sum payments to creditors.
Q: Do I qualify for debt settlement?
Most creditors don’t have specific guidelines when it comes to qualifying for debt settlement. That being said, the majority of debtors who are successful in negotiating down their debt to a reduced amount are struggling with a significant financial hardship that prevents them from making their monthly payments.
Q: What is a financial hardship?
A financial hardship is any unexpected situation that prevents a person from keeping up with bills and debt payments, possibly including job loss, illness or the death of a loved one.
Q: Can I settle my debts if I am current?
It may be possible to settle your debts if you are current on your payments, but for the most part, creditors don’t have much incentive to agree to a settlement on debts for which they are receiving payments.
Q: What is the difference between debt settlement and debt consolidation?
If you opt for debt consolidation, your debts will be consolidated into one lump sum and you will have to pay back the full amount, but typically at a lower interest rate, which can help you pay off the debt faster. With debt settlement, your debts are negotiated down to a lower amount that you will be required to pay back, usually with a lump sum payment.
Q: Why do debtors opt for debt settlement?
Many debtors in Los Angeles are burdened by overwhelming debt and feel like they are out of options. Debt settlement offers an opportunity for debtors to work with creditors to arrange a settlement that benefits them and allows them to get out from under their debt.
Q: What are the benefits of debt settlement?
By settling your outstanding debts, you can lower your monthly payments, avoid bankruptcy, avoid being sued, and put a stop to collection calls from creditors. Debt settlement can be a reasonably cost-effective method of resolving your outstanding debts, since you are not required to pay the total amount due on your debt, and can help you get out of debt faster.
Q: What are the risks of debt settlement?
Negotiating a debt settlement with your creditors will temporarily affect your credit score and there may also be certain tax implications you should be aware of.
Q: Why would a creditor agree to settle my debts?
The main goal of a creditor is to maximize the return on their investment. If you aren’t making your payments, your creditors aren’t receiving any money on the deal and debt settlement gives them the opportunity to receive some money, rather than none. They are also aware of the fact that if you decide to file for bankruptcy instead and have the debt discharged, they could end up with nothing.
Q: When are creditors willing to settle?
The willingness of a creditor to settle your debts depends on the creditor you are dealing with and the timing of the settlement. Generally speaking, if you are 90 days late on your payment or more, your creditor may be more willing to negotiate a debt settlement.
Q: Will debt settlement stop creditor harassment?
If you reach a settlement agreement with your creditor and pay the agreed-upon amount, you will be released from your obligation to pay the remaining balance on the loan and your creditor will no longer have the right to pursue payment from you in the future or take any collection actions against you.
Q: Will debt collectors call me during the debt collection process?
There are state and federal laws in place intended to protect consumers from creditor harassment, but the fact is that creditors or debt collectors may continue to call you, even when you are attempting to settle your debts. However, when you hire a debt relief attorney to handle your case, you can direct the creditors or debt collectors to contact your attorney, rather than calling you.
Q: Can I be sued during the settlement process?
Failure to pay your debts as they become due is a breach of contract and your creditors can file a lawsuit against you if you stop making your monthly payments. Unfortunately, the debt settlement process does not protect you against debt collection lawsuits, which means your creditors can still sue you for payment on your unpaid debts.
Q: Is there a statute of limitations for being sued?
In California, creditors only have four years to initiate a lawsuit against you in an attempt to collect payment on an unpaid debt. However, even if the statute of limitations has expired and your creditor no longer has the right to sue you, that doesn’t mean the creditor can’t call you and send you harassing collection letters.
Q: Can I represent myself in my debt collection lawsuit?
If a creditor has filed a debt collection lawsuit against you, it is your right to represent yourself, but you can significantly improve your chances of obtaining a favorable outcome in your case with a knowledgeable debt relief attorney on your side.
Q: Am I eligible for debt settlement if I am being sued?
Even if you have been sued by a creditor, you can still attempt to negotiate a settlement agreement, although the negotiation process may be different than it would have been without involvement from the court.
Q: Can business or commercial debts be settled?
Yes. In fact, the process of settling business or commercial debts is similar to the process of settling consumer debts, or personal debts. If you are considering debt settlement as a means of obtaining relief from debilitating business or commercial debts, it is in your best interest to speak to an attorney with experience handling business debt settlement cases.
Q: How will debt settlement affect my credit?
When you settle your debts with your creditors, the settlement will stay on your credit report for up to seven years and will indicate to potential lenders that you failed to repay the entire debt as agreed upon under the initial contract.
Q: What is a credit report and why does it matter?
Your credit report is a detailed breakdown of your credit history, including your payment histories on loans and debts. Credit bureaus like Experian, Equifax and TransUnion collect financial information about you to include in your credit report, which lenders use to determine your “creditworthiness.”
Q: What is creditworthiness?
Creditworthiness is defined as the extent to which you are considered a suitable candidate to receive financial credit, such as a mortgage loan or credit card. Your creditworthiness is generally based on how reliable you have been in paying back borrowed money in the past, so if you consistently make late payments on your loans and debts, or if you have defaulted on a loan, you may have a harder time obtaining credit.
Q: Can I continue using my credit cards when settling my debts?
During the debt settlement process, you will not be able to continue using any credit cards that you intend to settle with.
Q: Can my wages be garnished while I am settling my debts?
In order to garnish your wages to collect payment on the debts you owe, your creditors must first file a lawsuit, get a judgment against you and then obtain authorization from the court for the garnishment. Wage garnishment actions are not very common, and they can’t happen without advance warning. If an unpaid creditor does take action against you to garnish your wages, you may still be able to settle the debt, though the process could become more difficult and you could end up settling for more than you anticipated, since there is little incentive for the creditor to agree to accept less.
Q: How can I rebuild my credit following debt settlement?
Rebuilding your credit and improving your credit score after debt settlement can take time, but it is not impossible. You can re-establish your credit and build a solid foundation for a debt-free future by maintaining a budget, taking out a secured credit card, making on-time payments and paying off your credit card each month.
Q: How will debt settlement affect my taxes?
Because the IRS considers any “canceled” debts part of a person’s income, you could end up paying taxes on whatever amount your creditors forgive as part of the debt settlement process.
Q: Is debt settlement right for me?
Debt settlement might be a good option for you if you have experienced a financial hardship that has prevented you from keeping up with your monthly payments and you have more debt than you can afford to pay off in two to three years.
Q: Will debt settlement work for me?
For debtors in Los Angeles seeking an alternative to bankruptcy, debt settlement is a great way to resolve overwhelming debt for good, but it doesn’t work for everyone. Contact a knowledgeable debt relief attorney to find out if debt settlement is the best option for your situation.
Q: How will my creditors determine the debt settlement amounts?
Generally speaking, the amount your debts are settled for will depend on how delinquent your account is, how much you can afford to pay and how long you have had the account.
Q: Can’t I just continue making small payments on my debt?
Sometimes gradually paying off debt with a long-term repayment plan is possible, if you are able to keep up with your monthly payments. However, if the balance on your debt doesn’t seem to budge, or if you have to borrow money to make your payments, you should consider a more effective debt relief option.
Q: Can I trust a debt settlement company?
There are debt relief companies out there that claim they can settle your debt for less than you owe, but many of these companies are scams that prey on the desperation of individuals who are drowning in debt. If you are considering debt settlement as a means of resolving your debt, you should consult an attorney who has experience handling credit card settlement, second mortgage settlement and tax settlement cases in Los Angeles.
Q: Can I settle my debts on my own?
If you owe a small amount of money to one or two creditors, you can contact the creditors directly and see if you can negotiate a debt settlement on your own. If you have significant debt and numerous creditors, it is a good idea to retain an attorney who can help you calculate the best possible settlement scenario based on your financial situation.
Q: Why do I need to hire an attorney?
A reputable debt relief attorney will thoroughly analyze your financial situation and give you an accurate estimation of what debt settlement could do for you. With a qualified attorney on your side, you can ensure that you understand the debt relief options available to you, make a realistic plan to get yourself out of debt and then move forward with the debt settlement process.
Q: How can you help me?
Our attorneys at I Bankruptcy Attorneys specialize in bankruptcy and debt relief in Los Angeles and the surrounding area. We have helped thousands of clients in Los Angeles, Orange County, San Bernardino, San Fernando Valley and Riverside find relief from overwhelming debt through bankruptcy, debt settlement and other reliable methods of debt relief, and we can help you, too.
Q: Will I be charged for my consultation with your firm?
Our firm offers a free initial consultation for consumers considering debt settlement, bankruptcy and other types of debt relief in Southern California. All you have to do is call us and schedule your consultation so you can discuss your case with a knowledgeable debt relief attorney.
Q: Does it matter what kind of attorney I hire?
Only an attorney who specializes in Los Angeles bankruptcy and debt relief will have a clear understanding of the laws that apply to your case and how they can work in your favor. Don’t leave your case in the hands of an inexperienced attorney who doesn’t know everything there is to know about bankruptcy and debt settlement in Los Angeles.
Q: How is hiring a law firm better than hiring a debt settlement company?
Debt settlement companies may be able to negotiate with your creditors to settle your debts, but the people who work for these types of companies aren’t attorneys, and if you end up being sued by your creditors, they won’t be able to provide you with reliable legal advice or legal representation.
Q: How soon will you begin working with my creditors?
When you retain our debt relief attorneys at I Bankruptcy Attorneys, we will immediately get to work analyzing your financial situation and taking account of your assets and the debts you owe so we can advise you on the best course of action for settling your debts.
Q: Will I have to go to court?
Debt settlement is a debt relief process that takes place outside of the courtroom, which means you won’t have to appear in court to settle your debts. If a creditor sues you for payment, your attorney may be able to settle your lawsuit. If the creditor agrees to the terms of the proposed debt settlement, the lawsuit will be dismissed, and the case will be closed.
Q: Are bankruptcy and debt settlement my only options?
If your creditors won’t settle your debt and you aren’t able to file for bankruptcy, you may have other debt relief options, such as credit counseling, debt management or debt consolidation.
Q: What is the difference between debt settlement and credit counseling?
With credit counseling, you pay back all of the debt you owe, plus interest and fees, while you only pay back a portion of what you owe with debt settlement. Generally speaking, credit counseling costs more and takes longer than debt settlement.
Q: Will I be completely debt free after settling my debts?
Debt settlement is generally used to resolve overwhelming unsecured debts, such as credit cards and medical bills, not secured debts, such as mortgages or car loans. However, by settling your unsecured debts, you may be able to free up some cash to pay down your secured debts.
Q: Will I continue to be charged interest while I settle my debts?
Yes, you will continue to accrue interest on the debts you owe until your debts are settled.
Q: Is debt settlement guaranteed?
There is no guarantee when it comes to debt settlement. Your ability to settle your debts depends a great deal on your creditors, but it also depends on the negotiation skills of your debt relief attorney. At I Bankruptcy Attorneys, our attorneys have experience in all areas of debt relief, debt settlement and bankruptcy, and with our legal team on your side, you can significantly improve your chances of obtaining relief from your debts.
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