So, you’re over your head in debt and desperately need help. You’ve heard about debt relief programs, but is that strategy right for you? Here’s some info about the consequences of debt relief programs, and other strategies you can consider.
How Debt Settlement Works
A recent survey by Northwestern Mutual found that a majority of U.S. residents – 53 percent – listed debt reduction as their top financial priority. So, if you think debt settlement might solve your problems, you’re far from alone.
Debt settlement is a deal that’s negotiated with your unsecured creditor allowing you to pay off a debt with a one time payment in full that’s less than the total amount owed. These companies usually charge a flat fee or a percentage of the debt (usually around 15 percent) that was canceled.
While the company is negotiating, it may require you to make monthly deposits in an escrow-like account that’s under your control but is administered by a third party.
The company may also encourage you to cease paying creditors until a debt settlement agreement is struck. Once an agreement is reached, fees begin accruing after you’ve made at least one settlement payment. Remember, though, there’s no guarantee the firm can reach a debt settlement for all your debts. It’s totally at the discretion of your creditors.
The Dangers Of Debt Settlement
On the surface, it all sounds hunky-dory. You pay the debt settlement company, which then pays your creditors. Ultimately, everyone gets paid and you’re able to move forward with your life. But there are consequences of debt relief programs, and one of them has to do with you stopping paying your creditors.
Creditors don’t typically settle debts unless they’re a few months past due. So, you must cease paying your accounts and let them become delinquent. It usually takes between 26 to 48 months for the debt settlement company and credit card company to reach an agreement. While negotiations are going on, interest and late fees are growing. Your credit score will plummet, and you likely will start getting collection calls. Until you start demonstrating favorable credit activity, you’ll have a hard getting new credit cards and loans.
Of course, if you’re in a place at which debt settlement looks like your best option, your credit score will have already declined. You can start building it back up again once you complete the program.
The Aftermath
If your debts are ultimately settled with creditors, the negative credit marks aren’t eliminated from your credit report right away. Rather, your report will have a citation showing that you’ve settled your obligations, which isn’t nearly as good for your credit score as a “paid in full” notation. Though it is better than “charged off as bad debt.”
One more thing, the Internal Revenue Service treats some forgiven debts as income and could expects you to pay income taxes on the forgiven total.
Alternative Solutions
One strategy to consider before debt relief is consumer credit counseling, which helps you establish a debt management plan with your creditors. You may be able to get your monthly payments reduced, and you still may pay your balance in full, which helps your credit. The counselor can also provide you with new information and resources.
Instead of paying someone to do it for you, you can also work out your own payment plan with your creditors. See if your creditors have a hardship program for customers who are having financial troubles. You might be able to get a reduction in your monthly payment or credit card interest rate for six months to a year. Just be prepared to make a lot of calls and talk to a lot of different people. They won’t make it easy, it takes a lot of persistence, which is why many people seek professional help instead.
Now that you know the consequences of debt relief programs, and know about a few alternative remedies, you can go over your financial situation and choose your solution wisely.
