3494: What is Debt Settlement and How Does It Work? by James Lambridis of Debt MD on Debt Settlement Explained

Summary

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Optimal Finance Daily – Episode 3494:

What is Debt Settlement and How Does It Work?

By James Lambridis of DebtMD | Hosted by Diania Merriam

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Episode Overview

This episode explores the essentials of debt settlement: what it is, how it functions, its potential risks, and crucial considerations before choosing this path for managing overwhelming personal debt. Diania Merriam reads a post by James Lambridis of DebtMD, then shares her own reflections and alternative options, especially emphasizing the role of non-profit credit counseling.

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Key Discussion Points & Insights

What Is Debt Settlement?

[01:01]

• Debt settlement organizations negotiate for you with creditors and debt collectors to reduce the amount you owe.
• Aimed at people deeply in debt, often with maxed-out credit cards and mounting payments.
• Typically, you stop making direct payments to your debtors and instead pay into an escrow-like account managed by a third party.

  “The goal is to resolve all your debt owed to credit card companies, medical facilities and other debtors. Your outcome with the settlement should be less than the total amount you owe.” – James Lambridis [01:29]

How the Process Works

[01:50]

• After starting a plan, you’ll make monthly lump sum payments into the managed account.
• Debt settlement companies request you halt payments to creditors during negotiation.
• Only after collecting sufficient funds will the company attempt to settle debts with creditors.

Key Risks & Important Questions to Ask

[02:20] – [06:37]
James Lambridis urges listeners to ask themselves:

1. Will There Be Tax Consequences?

   • Cancelled or forgiven debt may count as taxable income.
   • Consult a tax professional.

   “If the creditor forgives a portion of your debt, that amount could be considered taxable income on your federal income taxes.” – James Lambridis [02:41]

2. Can You Afford the Payments for 3+ Years?

   • Debt settlement plans usually span at least 36 months.
   • Carefully assess your budget before committing.

3. Will All Debt be Included?

   • Creditors are not required to settle; some debts may not be resolved, leaving you still liable.

4. What is the Impact on Credit?

   • Stopping payments damages your credit score, incurs late fees, and could increase penalties.
   • Debt collectors may continue calling, though harassment is prohibited.

5. What Fees Will You Pay?

   • Most debt settlement companies are for-profit.
   • Always inquire about company fees and possible charges for the escrow account.

Warning Signs: What to Avoid

[06:00]

• Be cautious of companies that:
  • Guarantee they can settle your debt.
  • Charge any fees before settling your debt (illegal under FTC rules).
  • Promise a specific reduction percentage (e.g., “30-60% off”).
  • Push government programs or claim to settle for “pennies on the dollar.”
  • Say they can stop all debt collection calls.
• If it sounds too good to be true, it likely is.

What You Should Expect From a Reputable Debt Settlement Company

[06:38]
Companies must clearly disclose:

1. Pricing and Terms – All fees and terms of service.
2. Offers to Creditors – How much or what percentage must be saved before an offer is made.
3. Timeline – How long it will take before results.
4. Negative Consequences – Especially when advising you to stop payments.

“The debt settlement company needs to tell you how many months or years it will take to get results before it will make an offer...” – James Lambridis [06:38]

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Host’s Closing Thoughts & Alternatives

Diania Merriam’s Perspective

[08:56]

• Diania recommends seeking help from a non-profit credit counseling service over a debt settlement company that asks you to become delinquent.
• Highlights Consumer Financial Protection Bureau warnings:
  • Settlement can leave you deeper in debt.
  • Many creditors refuse to work with these companies.
  • Accrued penalties and fees can outweigh any negotiated reductions.
  • Negative impact on your credit score and possibility of lawsuits.
• Suggests alternatives:
  • Non-profit consumer credit counseling: Builds a debt management plan, negotiates with creditors, helps with budgeting.
  • Recommends the National Foundation for Credit Counseling for certified financial counselors and holistic support.

“If I was in a tough position with debt, I would work with a non-profit credit counseling service before I would consider a debt settlement company that would require me to go delinquent on my debt.” – Diania Merriam [08:56]

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Notable Quotes & Memorable Moments

• On the risks of debt settlement:

  “Debt settlement could leave you deeper in debt than you were when you started.” – Diania Merriam [08:56]

• On what to watch out for:

  “If it seems too good to be true, walk away.” – James Lambridis [06:11]

• On the importance of understanding negative consequences:

  “If you're asked to stop making payments to your creditors, the debt settlement company must inform you of the potential negative consequences...” – James Lambridis [06:38]

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Timestamps for Essential Segments

• [01:01] — Introduction to debt settlement
• [01:50] — How debt settlement works
• [02:20] to [06:37] — Risks and five critical questions
• [06:00] — Red flags/scams in debt settlement
• [06:38] — What reputable companies must disclose
• [08:56] — Diania’s closing thoughts and safer alternatives

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Final Takeaways

• Debt settlement is a potentially risky debt relief tool with significant consequences.
• Always investigate alternatives like non-profit credit counseling before considering commercial debt settlement.
• Never work with a company making aggressive or unfounded promises.
• Knowledge, caution, and professional advice are essential when navigating severe debt situations.

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Transcript

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this is optimal Finance Daily what is debt settlement and how does it work? By James Labridis of debtmd.com In a nutshell, debt settlement organizations help you negotiate or settle your debt to creditors and debt collectors. Debt settlement can be a financial lifesaver if you've hit the limit on all your credit cards and find yourself getting deeper in debt. How does debt settlement work? When you decide to go the debt settlement route, a representative from the debt settlement company will work with your creditors to lower the debt you owe and help you get out of the red and back in the green. Your representative will create a debt settlement plan specifically for your situation. The goal is to resolve all your debt owed to credit card companies, medical facilities and other debtors. Your outcome with the settlement should be less than the total amount you owe. Once the plan is created, you'll have a lump sum payment due each month. The debt settlement company typically asks you to transfer the money every month into an escrow like account managed by a third party not affiliated with the debt settlement company until you reach the payoff amount that you and the creditor settled on. You'll probably be instructed to stop making monthly payments to the credit card companies, medical facilities, and any other debtor included in the debt settlement. Is debt settlement risk free? While a debt settlement organization may be able to resolve one or more of your debts, there are still risks you need to consider. You should answer these five questions before you enroll in a plan. 1. Will there be tax consequences for debt forgiveness? Depending on your situation, there may be tax Consequences for Debt Forgiveness if the creditor forgives a portion of your debt, that amount could be considered taxable income on your federal income taxes. You should consult with your tax accountant, advisor or attorney to find out how debt settlement may affect your Federal Income Tax. 2. Will you be able to cover the monthly payment for three or more years? When you agree to a debt settlement plan, you're required to deposit money in an account for about 36 months or more until your debt is settled. Check your budget very carefully to see if you'll be financially capable of the monthly payments for the length of the plan before signing anything. If you think you'll have trouble making these payments, debt settlement may not be the best plan for you. Number three Will you be able to settle all of your debt? Unfortunately, your creditors are not obligated to agree to a settlement of your debt to them. That said, there's a possibility that the debt settlement company may not be able to reach an agreement with some of your debts. For those debts you can't settle, you'll still be required to pay them each month regardless of your debt settlement plan. 4. How does this impact my credit rating or score? Your representative at the debt settlement organization may persuade you to stop sending payments directly to your creditors. You need to realize that this could have a damaging impact on your credit report and credit score. You may even continue to accrue late fees, higher interest rates and penalties on the debt owed. Also, creditors and debt collectors may call to collect payment from you, although there are laws that prevent them from harassing you. What fees will I incur working with a debt settlement company? Most debt settlement organizations are for profit. Before you sign up with a debt settlement company, you need to ask what fees you will incur as the cost of doing business with them. Also, inquire if you'll be charged any fees for the savings account where you'll be transferring your monthly payment. What should you avoid when looking for a debt settlement company? When it comes to getting rid of debt, there's no shortage of scammers looking to make a buck off your desperation. To be debt free, you should stay away from any company that absolutely guarantees it can settle your debt. You should also avoid any debt settlement company if neglects to inform you of the risks involved. Bills any fees before it resolves your debts. By the way, this is prohibited under the FTC's Telemarketing Sales Rule tells you that it can settle your debt for a guaranteed percentage reduction, such as 30 to 60% of the amount owed. Pushes a new government program to eliminate all your credit card debt promises. It can make your debt go away or can be discharged for pennies on the dollar, or tells you it can stop all debt collection calls. If it seems too good to be true, walk away what should you expect from the debt settlement company? Before you enroll in a debt settlement service, the organization is required to provide you with the following information about the Number one Pricing and terms of services. The debt settlement company must reveal all fees and conditions of services. 2. Offers to each creditor. The company must inform you how much money or the percentage of each outstanding debt you must save before an offer will be made to the credit card companies and debtors.

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3.

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Length of time before results are realized. The debt settlement company needs to tell you how many months or years it will take to get results before it will make an offer to each creditor for a settlement and Number four Negative consequences of non payment if you're asked to stop making payments to your creditors, the debt settlement company must inform you of the potential negative consequences of stopping payments. This includes the negative impact on your credit report and credit score. You just listened to the post titled what is Debt Settlement and How Does It Work? By James Lambridis of debtmd.com when you're ready to start a business, there's so

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If I was in a tough position with debt, I would work with a non profit credit counseling service before I would consider a debt settlement company that would require me to go delinquent on my debt. The Consumer Financial Protection Bureau issued an article highlighting the dangers of working with debt settlement companies. Also sometimes called debt relief or debt adjusting companies, debt settlement could leave you deeper in debt than you were when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and to collect the funds required for a settlement, but some of your creditors may refuse to work with the company you chose. These settlement companies also charge expensive fees and in many cases they won't be able to settle all of your debts. If that happens, the built up penalties and fees on the unsettled debt may wipe out any savings the company achieves on settled debts. Stopping payments on your debt and avoiding the collection calls as debt settlement companies will tell you to do, will have a negative effect on your credit score and could result in the creditor or debt collector filing a lawsuit against you. An alternative to a debt settlement company is a non profit consumer credit counseling service. These nonprofits can attempt to work with you and your creditors to develop a debt management plan that you can afford. They usually will also help you develop a budget and provide other financial counseling. Check out the national foundation for Credit Counseling. They're a nonprofit network of certified financial counselors that can help you come up with a plan and negotiate your debt and that'll do it for this episode. Have a happy rest of your day and I'll be back with you again tomorrow where your optimal life awaits.