You must have read the ads stating “Chased by your creditors? Call to tackle your debt”. “Lower your monthly payments and be debt-free in 2 years.” That sounds so good, where to sign up?
Clearly, the title indicates the debt relief programs not being as kind as they’d like for you to believe. This is how it works – Sign up with a debt settlement company, They initiate the process of negotiation with your creditors so that to allow you to pay a lump sum that is actually less than the full amount owed. After that, you pay a fixed amount every month.
One positive side of a debt relief program is that it helps you pay a lower, single monthly payment. And you pay less than you did actually owe. Just like the positives, there are many negatives as well; get comfortable.
Damaged Credit
This is definitely going to stay with you for a long time. When you begin with the program, the company asks you to stop making any payments on your outstanding debts (recommending to carry with this for 6 months or so). The reason behind this move is to make the creditors worry about you not paying the debt at all. This would make the creditors choose something over nothing, thus, willing to negotiate with the hired help – a debt relief company.
As you will ignore the creditors, they’ll continue to report late payment updates to the credit bureau until your account is settled. Apart from this, the fact that you didn’t pay the full amount sticks to your credit report history for minimum 7 years. According to the programs, it is only short-termed, and it can be improved once you are debt-free. They also say that it’s better on your credit than bankruptcy.
Fees
A percentage of between 18-25% is paid by you on your total debt. So if you owe $60,000 and the company charges 20%, then you have to pay them $12,000. But, here’s the twist. Most of the firms won’t tell you exactly how much of your monthly payment is targeted towards your debts, and what is the fee amount that needs to be deducted.
Some companies also demand upfront fee, which has been a major issue with debt relief companies. Whereas, others charge for the services they hadn’t even performed and keeping that money without any debt reduction solution.
Taxes
In case you get settled or forgiven for a debt which is more than $600, the amount will be considered as taxable income, and you get eligible to pay taxes. For instance, if you negotiate a $15,000 debt down to $8000, that remaining $7,000 will automatically become taxable income.
Lawsuit
A creditor has every right to file a lawsuit against you on the basis of debt collection. The websites that offer the programs have limited information available regarding this, except to say that their aim is to complete the program as soon as possible so that any lawsuits can be avoided.
So, there’s that.
No Guarantee, and Might Worsen your Financial State
There is no guarantee of the fact that your debt will be reduced to the point you have hoped for. Some lenders are not constrained to accept settlement offers. Some lenders even refuse to work with debt settlement firms.
On the other side, since you are not paying your bills, you’ve stacked up the penalties as well as the fees on your outstanding debt. In case the debt settlement company doesn’t go for settling all of your debts, you are trapped in the cage of paying the additional fees on top of your existing debt. To sum it up, you could end up having more debt than you have started with, therefore, giving creditors even more reasons to trouble you.
Conclusion
If you feel stuck in a financial situation where you feel that opting for a debt relief program can prove to be a life-saver option for you, then you must go to a professional debt settlement consultant. This way you’ll have a better chance of saving your credit, money, and sanity.
With an ideal debt management firm on your side, you’ll be surely swimming out of the deep sea of debt.