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(The following is for education purposes only and not legal
advice. To learn more about the legal ramifications of debt
settlement, please talk to an attorney licensed in your state).
Another common objection to debt settlement is the possibility that
you can be sued by your creditors. Since during the course of a debt
settlement program a consumer’s payment are past due, creditors are
reserved the right to pursue legal action on a defaulted contract,
and in fact, legal action against clients does happen and is in fact
a real possibility. In the worst case scenario, if a creditor files
a lawsuit and wins a judgment against you, it’s possible they can
garnish your wages, put a lien on your property, or levy you’re your
bank account. Although the possibility of legal action exists, in
many cases it does not make financial sense for the creditor to do
so. Oftentimes creditors use threats of legal action to give the
creditor account a higher pay-off priority, so they get paid first.
There are three main reasons why this is true:
1. The costs associated with filing a lawsuit against debtors can be
costly and time-consuming. For this reason legal action is typically
a last resort for creditors when they have exhausted all other
collection options. When a settlement offer is on the table whereby
the creditor can collect between 25 and 60 percent of the balance in
a lump sum, the costs and risks of filing a lawsuit instead may not
make financial sense, particularly in light of the following point:
2. The debtor can still file bankruptcy. When legal action is
imminent many consumers opt to file bankruptcy rather than deal with
wage garnishment or a lien on their home. In many cases bankruptcy
leaves the creditor with nothing, and they still are liable for the
court costs and the law firm’s legal fees.
3. A payment plan can still be reached. Since the costs associated
with filing suit, locating a debtor’s assets, and executing a
judgment can be quite high (not to mention many people file
bankruptcy once it gets to this stage), creditors typically are
willing to work out a payment plan even after a lawsuit has been
filed. Although this is far from ideal and it will likely be costly
for the consumer, as in some cases the client will be forced to
consent to a judgment, which will appear on their credit, and
particularly since the account balance will have increased due late
fees and interest charges added on the account until the resolution
is reached, a payment plan may be a better option for the debtor
than bankruptcy or wage garnishment. Usually there are interest
rate concessions on the payment plan –usually ranging from 0% to the
legal limit of the state in which you reside. In some cases, the
law firm will impose the contractual interest rate on the payment
terms if allowed by the client’s state, although this is rare.
4. Settlements are still possible at this stage. Again the
percentages are not ideal - 60 to 80% of the current balance, which
has increased because of late fees and interest, is the norm - the
savings versus making the minimum payments is still substantial.
Follow this link to discover some other
cons
of debt settlement.
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