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Debt FAQs

Welcome to the Debt FAQs Page! Here we have answered some of the most frequently asked questions regarding tax debt relief, consolidation and settlement, and student loan debt. Click on any of the questions below for our answer. Don’t see a question that you’d like to see the answer to? Contact Us, and we’ll be sure to take a look at it!



Basic Debt Questions

What is unsecured debt?

What is secured debt?

What is an interest rate?


Consolidation

What is debt consolidation?

How much do consolidation services usually charge?

How much will my interest rates change over time?

Do consolidation companies offer debt counseling services?

What is a certified counselor?

What does it mean to be ISO certified?

What does it mean to be a non-profit company?

Does debt consolidation affect my credit score?


Settlement

What is debt settlement?

Do companies charge any up-front fees?

How much will debt settlement save me?

What is an escrow account and why do I need one?

Is debt settlement better than declaring bankruptcy?

Will debt settlement affect my credit score?

How long does the debt settlement process take?

Will the debt settlement company make payments to my creditors?

Will debt collectors stop calling me while I’m enrolled in debt settlement?


Tax Debt Relief

What is tax debt relief?

What fees are associated with tax debt relief?

What is an “offer in compromise”?

Can tax relief companies file my taxes for me?

What documents do I need to have for the IRS to review my case?

Will tax debt relief affect my credit score?

What is debt settlement?


Student Debt

What is student loan refinancing?

What is an auto pay discount?

Will applying for a student loan refinancing affect my credit?

Can I refinance both federal and private loans?

Do student debt refinancing companies accept co-signers?

What is a fixed interest rate?

What is a variable interest rate?

What are the usual term lengths for refinancing?



What is unsecured debt?

Unsecured debt is any type of debt not tied to collateral or assets. Most types of debt are unsecured. If consumers fail to make payments on these types of debt, creditors will not have the ability to come after personal property, unless they file a lawsuit.

  • Types of unsecured debt include:
  • Credit cards
  • Department store cards
  • Medical bills
  • Student loans
  • Personal loans
  • Judgments (without garnishment)

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What is secured debt?

Secured debts are those tied to collateral which creditors have the ability to claim if consumers fail to make obligatory payments. Secured debts are classified as voluntary, or involuntary (debts imposed by state and federal law).

Voluntary secured debt includes:

  • Home loans
  • Car loans
  • Shares of stock
  • Inventory

Involuntary secured debt includes:

  • Real property taxes
  • Liens for past due income taxes
  • Judgment liens
  • Mechanic’s lien

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What is an interest rate?

Interest rate is the amount a lender charges consumer’s to borrow or use their property, and are typically noted on an annual percentage rate (APR). Lenders apply interest in one of two ways – Simple and Compound. Simple interest is calculated strictly on the principal loan amount, whereas compound interest is applied not only to the principal, but also on the accumulated amount of interest based on previous months. In essence, compound interest is paying interest on interest from the previous months.

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What is debt consolidation?

Debt consolidation is combining some or all unsecured debts into a single loan, usually resulting in a lower interest rate and/or lower monthly payment. While many consolidation companies don’t provide a consolidation loan, they do offer consolidation services, which mirror the single payment consolidation – minus the loan. Clients enroll all of their unsecured credit accounts to a debt management program (DMP) and make a single payment to the company of choice. Negotiators or arbitrators reach out to creditors to create a monthly payment plan suitable for client’s budgets. Each month, the consolidation company splits the payment between creditors and keeps a portion as their payment.

These plans vary in length with many aiming to get clients out of debt within 12-48 months. We advise seeking a company willing to put in extra effort to resolve debt in fewer than 36 months.

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How much do consolidation services usually charge?

Debt consolidation companies typically have a set-up or activation fee for their services and charge an additional monthly amount for the duration of the programs. Several companies have been shut down in the past for unfair pricing tactics, and this industry is now state regulated to reduce harm caused to clients in unfair business practice.

Each state has a fee guideline and no state is allowed to charge consumers more than $75 up front, or monthly, for consolidation services. Typical state standard is no more than $50, and we advise seeking a company offering a modest rate. Some states, however, don’t have specific guidelines protecting residents in place, but under the state initiative, officials have said a company must charge a “fair amount” – MI, for example.

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How much will my interest rate change over time?

Consolidation services aim to reduce the overall financial burden of consumers by negotiating with creditors to reduce interest rates, waive late and over-the-limit fees. Many consolidation companies have built relationships with the nation’s leading creditors which provides a little more leverage when it comes down to negotiation.

Interest rate reductions vary creditor-to-creditor. The average rates consumers will see after enrolling in a consolidation program is between 6 percent and 12 percent. For consumers with unsecured credit debt, it’s imperative to ensure interest rates will be reduced from what are already in place. It would make no sense to enroll credit cards with a 9 percent interest rate for a 10 percent interest rate.

Several creditors have implemented extreme economic hardship programs to reduce rates to 0% for the duration of the program as a way to help consumers under extreme cases get back on their feet.

When considering this option, it’s important to be sure this is the approach you’re willing to ride out for the duration of the program. If you decide to opt-out, creditors will have the ability to drastically increase interest rates, tack on those difficult to remove late and over-the-limit fees, and it may also create an additional negatively impact to your credit score.

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Do consolidation companies offer debt counseling services?

Many of the industry leaders offering consolidation services also provide credit counseling as a means to get consumers educated on the dynamics surrounding the credit industry and how to implement personal changes to stimulate financial growth and prosperity. Not all consolidation companies provide credit counseling services and we recommend doing some research to ensure the company has the best interest of their clients at heart. Most of the non-profit organizations provide credit counseling services free of charge to the general public.

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What is a certified counselor?

Many of the industry leaders offering consolidation services also provide credit counseling as a means to get consumers educated on the dynamics surrounding the credit industry and how to implement personal changes to stimulate financial growth and prosperity. Not all consolidation companies provide credit counseling services and we recommend doing some research to ensure the company has the best interest of their clients at heart. Most of the non-profit organizations provide credit counseling services free of charge to the general public.

Several organizations are available to become a certified credit counselor including the Financial Counseling Association of America (FCAA – formerly known as the AICCCA), the largest national association representing non-profit organizations. Another widely known organization is the National Foundation for Credit Counseling (NFCC).

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What does it mean to be ISO certified?

Do consolidation companies offer debt counseling services?

ISO stands for the International Organization for Standardization. This is a non-governmental organization which developed and published an international set of standards supporting innovation and solutions to global affairs.

Credit companies holding ISO certification are typically found under the ISO 9000 sector, which addresses aspects to quality management enabling companies to ensure services consistently meet the needs of the customers and consistently implement improvements toward quality.

Standards in the ISO 9000 family include:

  • ISO 9001:2015 – sets out the requirements of a quality management system
  • ISO 9000:2015 – covers the basic concepts and language
  • ISO 9004:2009 – focuses on how to make a quality management system more efficient and effective
  • ISO 19011:2011 – sets out guidance on internal and external audits of quality management systems.
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What does it mean to be a non-profit company?

A non-profit company in this industry is typically seen in the 501(c)(3) sector which is considered a charity or private foundation and must obtain a large portion of their revenue from a broad public support base. Non-profit credit consolidation companies must use most of their earnings toward the programs offered, and not toward the bottom line. In addition, they must operate under strict standards set by the IRS and at a state level, which is how states are able to regulate the upfront fees for companies in this industry.

Most non-profit credit consolidation companies will provide credit counseling services to anyone requesting it completely free of charge. Sessions are typically an hour or more in duration; and if a non-profit company does not provide this free public service, we recommend avoiding them entirely.

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Does debt consolidation affect my credit score?

When weighing the pros and cons to debt consolidation, several companies fail to inform consumers that these programs will negatively impact credit scores, although not to the detriment of a bankruptcy. Adverse credit ratings will be determined by the creditors and not the consolidation company. In most instances, creditors will report to the credit bureau when someone has enrolled in a program. In rare cases, it will go unreported and credit may not be affected.

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What is debt settlement?

Debt settlement is the process of reducing the total amount of debt owed to creditors by a percentage. Debt settlement companies typically only take on unsecured debt types and negotiate with creditors to settle a debt for around 50 percent of what was originally owed.

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Do companies charge any up-front fees?

Any company charging clients upfront fees for their services would be practicing illegally. As of 2010, the FTC banned companies from charging upfront fees for settlement services, as several companies before then charged clients an outrageous upfront fee and never settled the clients’ debt.

We recommend going with a company who doesn’t boast about not charging upfront fees, because it’s widely known it is against the law and they are simply using it as a marketing tactic. Choose a company who truly follows this guideline and follow through to program completion for the best financial outcome.

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How much will debt settlement save me?

Companies typically charge clients on a percentage of the total amount of debt enrolled into the settlement program. Industry standard is between 20 and 25 percent, with an overall reduction of approximately 30 to 50 percent of total unsecured debt. The example below can be used to help breakdown how it works:

If a client enrolls $10,000 in debt and the company practices fairly using a performance-based fee model, and charges 20 percent for their services, while reducing the overall debt by 40 percent, a client will see a savings of approximately 20 percent of the total amount of debt enrolled.

10,000 x 20% = 2,000 (their company fee)

10,000 x 60% = 6,000 (reduced by 40%)

6,000 + 2,000 = 8,000 (2,000 reduction from 10,000)

While this may not seem like a big difference, a savings of $2,000 can mean a roof over a head for a couple of months. Keep in mind, savings will vary and it’s typical for clients to see debts reduced from $60,000 to $6,000 – it’s all dependent on the creditor.

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What is an escrow account and why do I need one?

Most debt settlement companies require clients to set up an escrow account with an FDIC-insured bank. These accounts are used to make a predetermined monthly payment toward in order to save enough to begin the negotiation process. The leading bank in this industry is Global Client Solutions (GCS). Keep in mind most of these banks require account holders to pay a nominal monthly fee, which will be auto-debited from the account. Fees are typically less than $10.00 and will not be granted refunds should clients decide to opt-out of the settlement program.

The FTC has also ruled any consumer may withdraw from the debt relief service at any time within 7 business days without penalty and receive all unearned provider fees and savings.

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Is debt settlement better than declaring bankruptcy?

The typical settlement candidate will have several unsecured credit accounts, will have a hard time keeping up with payments, will have fallen behind several months, and have accounts tied up in collections.

While we aren’t going to advise one or the other, it’s important to note how many debt settlement companies use schemes and advertisements claiming they can save you thousands of dollars if you don’t declare bankruptcy and jump on their bandwagon. This is false and here’s why: these companies are not well informed of each specific case and often times tell clients to STOP paying their credit debt so they can secure your business. By doing this, credit accounts can go into default, interest rates increase, late charges are tacked on, and you’re stuck with the overall consequence. This creates a case for creditors to file a lawsuit which may in turn force clients to file for bankruptcy.

We recommend going with a company who has the best interest of consumers at heart and advises consumers to speak with a bankruptcy lawyer in order to make an informed decision on whether bankruptcy or settlement is the best option.

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Will debt settlement affect my credit score?

Many debt settlement companies out there claim their debt settlement process will not have an impact on their clients’ credit scores. This is claim is absolutely false and we recommend avoiding these companies all together.

The truth is debt settlement will have adverse effects on credit scores which reflect impacts brought on by bankruptcy. If you’re considering settlement or bankruptcy and basing your decision around credit score impacts, unfortunately, they are pretty much the same.

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How long does the debt settlement process take?

Industry standard is to have debt settled between 12 and 48 months, although we feel 48 months is a little lengthy considering some companies will scheme in an additional “monthly maintenance” or “administrative charge.” Some companies attempt to have unsecured debt settled within a few months of hire, although you’ll be required to come up with a quick lump sum of cash to settle debts.

We recommend finding a company who will work diligently and proactively on getting debt settled and not riding out as long as possible to secure a larger fee. If you can come up with quick cash, settling sooner rather than later is the best way to go.

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Will the debt settlement company make payments to my creditors?

No. Debt settlement companies do not make payments to creditors. What typically happens once clients enroll into a settlement program is negotiators immediately get in touch with creditors informing them of such. Once a settlement is successfully negotiated, clients will accept the terms and pay creditors from the FDIC-insured Special Purpose Account.

We suggest paying more than the monthly predetermined amount into the account, if possible, because creditors will continue to charge interest, late fees, and report to collections. Overtime, it can create a bigger mess.

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Will debt collectors stop calling me while I’m enrolled in debt settlement?

Harassing creditor calls may not stop entirely, but they will be reduced if consumers go with a company sending out letters to creditors; however, keep in mind, this could negatively impact consumers. Keeping in touch with creditors is important, even if they must continually be informed that you’re in a settlement process. If you continually neglect their attempts to reach you, it may result in a lawsuit.

If creditors engage in harassment, legal action can be taken to put it to a halt. Some forms of harassment are:

  • Repeatedly and continuously calling with intent to annoy, abuse, or harass
  • Communicating with clients who are represented by an attorney
  • Seeking unjustified amounts
  • Communication at the clients place of employment after they have been advised by the employer to cease calling during work
  • Calling during unreasonable hours – before 8:00 a.m. and after 9:00 p.m. local time zone

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What is tax debt relief?

Tax debt relief is the process of getting out from tax debt owed on an IRS and state level. Consumers seeking tax debt relief typically find themselves with outstanding tax debt and have continually ignored IRS notices for years, and are seeking refuge from IRS collections, penalties, and interest with resolve in wage garnishments and bank levies.

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What fees are associated with tax debt relief?

Tax relief companies will assess fees in a couple of different ways. The typical method is charging a flat-rate fee. A consultation will determine the financial status of consumers and evaluate which approach to resolution would be the most beneficial; then, the fee will be determined within a written contract. Other methods include charging on an hourly basis, which can leave consumers in the dark concerning their overall out-of-pocket expenses. Less likely to be imposed is a fee assessed by “task.” This method enables companies to charge separate fees for every aspect of work they do on the case and typically incurs the highest charge for clients.

We recommend working directly with the IRS to work out a payment plan if you have less than $10,000 in debt because, either way, there is no escaping the IRS and requesting an Installment Agreement may be less costly than signing up with a company who will charge for the same service.

Industry standard can be seen from $1,500 to $5,000 for tax cases.

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What is an “offer in compromise”?

An Offer in Compromise (OIC) allows taxpayers to settle tax debt for less than the total balance owed. It’s important to keep in mind these programs are difficult to qualify for as taxpayers must demonstrate an extreme economic hardship while also being current with all previous filling and payment requirements. For consumers in an open bankruptcy, an OIC will not be granted.

Be wary of companies claiming they can get you an OIC, because again, IRS stats show it is highly unlikely that most taxpayers will have an OIC granted.

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Can tax relief companies file my taxes for me?

Several tax relief companies are able to file taxes for their clients, although many of them do not offer these services. Some companies handling clients back tax debt keep clients coming back because they offer a certain amount of years of free tax filing if they sign with the company to handle tax debt.

If consumers are simply seeking a company to file taxes, we recommend going to your local accountant or tax filing office if you’re unable to file taxes on your own, rather than getting haggled into excessive fees imposed by tax relief companies.

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What documents do I need to have for the IRS to review my case?

Being well prepared can make it easier for the IRS to review your case and prepare a response if you’ve received an IRS notice. The following documents and records will come in handy and range from simple to complex:

  • Receipts
  • Cancelled checks
  • Pay stubs
  • Bank statements
  • 401k statements
  • Social Security numbers
  • Reported income on 1099 for self-employed consumers
  • Health care coverage
  • Transcripts of previous tax returns
  • Bookkeeping and payroll info for business

Contact the IRS at 1-866-681-4271 for any documents that you need but cannot otherwise locate.

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Will tax debt relief affect my credit score?

Several variables come into play on how taxes impact credit scores. The most notable way for credit scores to take a big hit is if the IRS places a lien against taxpayers, and are more prominent for those with a tax bill exceeding $10,000.

Opting for installment agreements typically will not have any negative impact on credit ratings because you’re simply making contractual payments. If, however, you stop making payments, then yes, the IRS can report this to the credit bureaus.

We recommend seeking advice from an experienced and licensed tax practitioner to determine the best solution to avoid negative credit ratings in conjunction with the best method to getting your tax debt resolved.

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What is student loan refinancing?

Student loan refinancing is an option several student borrowers seek out in hopes of being granted lower interest rates or a more affordable monthly payment – or both. Refinancing requires a new loan to be taken out to pay off the existing loans and for married couples, the ability to combine the loan is also an option with some student loan refinancing companies.

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What is an auto pay discount?

Several lenders offer an auto-pay discount option when borrowers sign up for electronic debit from personal bank accounts. Industry standard for using this auto-pay option is typically an interest rate reduction of .25 percent, which can save the already struggling student borrower thousands in the long haul.

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Will applying for student loan refinancing affect my credit?

Yes, but not drastically. Applying for student loan refinancing can be compared to applying for any type of credit. A soft credit pull is performed to determine qualification, and the only way a negative impact will be imposed on your credit report is if you fail to make the contractual payments.

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Can I refinance both federal and private loans?

Several private banks and lending institutions have the ability to refinance both private and federal loans; however refinancing federal student loans is something you’ll want to heavily consider before you apply with a private lending company. Federal student loans carry some advantages not offered with private loan types such as the potential to have the loans forgiven overtime. Private student loans are also offered on a fixed-rate so you’ll never have to worry about interest due to the fluctuating market. In addition, there is the potential to be granted an income-based repayment option if you’re holding a federal loan.

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Can I refinance both federal and private loans?

Loan refinancing doesn’t always require a co-signer, but now-a-days it’s better to have one during the application process. Many of the leading private student lenders require applicants to have a fairly decent credit score, usually no lower than 650, with some requiring a 700+. In fact, some lenders absolutely require a cosigner to protect their assets, although this is rare.

We recommend finding a company allowing you the independence of applying on your own, although we also suggest having a co-signer available for back up because you’ll receive better term rates than by not having one.

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Do student debt refinancing companies accept co-signers?

Loan refinancing doesn’t always require a co-signer, but now-a-days it’s better to have one during the application process. Many of the leading private student lenders require applicants to have a fairly decent credit score, usually no lower than 650, with some requiring a 700+. In fact, some lenders absolutely require a cosigner to protect their assets, although this is rare.

We recommend finding a company allowing you the independence of applying on your own, although we also suggest having a co-signer available for back up because you’ll receive better term rates than by not having one.

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What is a fixed interest rate?

Fixed interest rates on student loan refinancing remain the same for the life of the loan, and the payment will never change. Fixed interest rates may be higher than variable interest rates, but offers a sort of security should the market experience an extreme change.

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What is a variable interest rate?

Variable interest rates are produced on the LIBOR structure published in the Wall Street Journal on the 25th day each month. Rates will fluctuate over the life of the loan and will also vary based on applicable terms. It can leave a lot to the imagination, but the benefits of a variable loan are that they are typically lower than fixed rates.

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What are the usual term lengths for refinancing?

Term lengths are strictly dependent on the financer. Several lenders will offer terms ranging from 5 to 15 years, while other require a strict 7 year contract – no more, no less. We recommend doing some research and finding a company who will work with your unique financial goals, extending term lengths around what you can afford to pay on the principal and interest each month.

In addition, we advise seeking out a company with no early payoff penalties, which are benefits extended by several of the nation’s leading student refinancing lenders.

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Poll

  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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