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Debt Settlement

If you have a significant level of debt such as credit card bills, unpaid medical bills and loans, a debt settlement agency or attorney can negotiate with your creditors to reduce the amount you owe. Typically, though, creditors are only willing to accept a settlement when they recognize that you lack the resources to pay them in full.

Debt settlement can stop collection calls and letters once the negotiation is complete and can help you avoid declaring bankruptcy. Generally, you can eliminate some debt immediately once your creditor has agreed to a settlement. Your remaining debt payments are likely to be lower than when you were attempting to pay each debt in full.

Past Due Debt

Debt settlement can be particularly helpful if you have old debt that has been turned over to a collection agency and you are being harassed by creditors. Each state has a different rule about how long a creditor can continue to request payment on a debt. In Virginia, the statute of limitations on a promissory note is five years. The statute of limitations is six years for oral and written contracts and credit card or other open-ended accounts, so if you have a collector demanding repayment on a bill that’s older than six years, you shouldn’t need to pay it.

Not all debt is eligible for settlement and not all creditors will agree to negotiate, but in general, you can ask a debt settlement company to help you with credit card debt, collection accounts, medical bills, unsecured loans and lines of credit, car loans and judgments.

How To Find Help

The Fairfax County government offers tips for consumers to make sure they are working with a legitimate debt settlement company. The Consumer Affairs Branch of the Fairfax County government recommends that you avoid doing business with any company that promises to settle your debt if the company:

  • Promises that your unsecured debts can be paid off for "pennies on the dollar"
  • Requires large monthly service fees 
  • Demands payment of a percentage of what they have saved you
  • Tells you to stop making payments or communicating with your creditors
  • Claims that creditors never sue people for not paying their unsecured debts
  • Claims that they can remove accurate negative information from your credit report

Fairfax County officials recommend checking with the Virginia state attorney general’s office or the state or local consumer protection agency for complaints about a debt settlement agency before working with one. If you are unemployed or are earning a low income, you can contact the Virginia Legal Aid Society, which can help you find a lawyer to provide legal advice on debt settlement.

While debt settlement can help you get out from under too much debt, you should be aware that your credit score will be hurt if you stop paying your creditors while negotiating the settlement. Once your debt has been eliminated your credit score will eventually improve. In addition, you may be required to pay federal and state income taxes on the amount of debt that is forgiven, since it is considered income.

Credit Counseling

Struggling with financial problems such as too much credit card debt or collections calls from old medical bills? You may want to consider consulting a credit counselor. While a credit counselor cannot eliminate your debt on the spot, you can typically receive free financial education materials, workshops and counseling that will help you set a budget and work your way out of debt.

Depending on the level of your financial problems, the Virginia state government suggests that consumers may want to take advantage of the following types of services available from nonprofit credit counseling agencies:

  • Budgeting classes.
  • Individualized credit counseling.
  • Debt management plans that help you combine your debts and repay them over time.
  • Debt consolidation plans that can lower the cost of your debt by combining them and financing them with a second mortgage at a lower interest rate.

If your debt problems are so severe that you are considering declaring bankruptcy, you’re required to consult with a nonprofit credit counselor within 180 days before filing for bankruptcy.

What To Expect

While educational materials and classes are generally free, you may need to pay a small monthly fee of $25 to $40 for individualized credit counseling.

If you choose to establish a debt management plan, this will usually require a setup fee of $50 to $75.  The credit counselor will negotiate with your creditors for a reduced interest rate and to waive late fees or over limit fees in order to jump-start your debt repayment.

Be wary of companies that offer debt settlement plans or debt negotiation plans because they can be scams. The Federal Trade Commission (FTC) warns that giving cash to a debt settlement company can result in your loss of that money, damage to your credit history and a deeper debt problem if you have stopped paying your creditors.

At your first credit counseling session, you should be prepared with complete information about all of your debts, your income and assets and your monthly expenses in addition to revolving debt. Your credit counselor will go over all of this information with you and determine whether you have enough income to pay your monthly expenses and to help you develop a spending and saving plan that you can implement on your own. You and your credit counselor can determine if a debt management plan is appropriate for your individual situation.

Where To Find Help

When you’ve made the decision to seek help, it’s important to be very careful about who you choose. You don’t want to share your personal financial information with someone who you can’t trust. The Virginia State Corporation Committee (SCC) publishes a list of licensed credit counseling agencies in Virginia. Another source for trustworthy credit counselors is the National Foundation for Credit Counseling, where you search by location for credit counselors. You can also find credit counselors at universities, military bases, credit unions, state and local housing authorities and at branches of the U.S. Cooperative Extension Service.

Some credit counselors offer advice by phone or by email, but in-person counseling can be extremely beneficial and help you develop the discipline to follow through with your plan. Self-discipline is one of the most important components of a successful credit counseling relationship and is necessary for the success of your financial improvement plan.