If you are not cautious in choosing a debt relief option for you then it can cause more pain than relief. It will make your financial situation even worse. You will also need to follow all the requirements of the specific debt relief option that you choose so that you do not end up facing the negative consequences.
For example, if you choose to take debt settlement as your suitable debt relief option you may be asked by the debt relief service provider to stop:
- All communications with your creditors
- Accepting debt collection calls and even
- Making any payments to your creditors.
However, you should know that as you ignore the lenders, they will continue to report it along with the late payment info and updates to the credit bureau. This will affect your credit score in a negative manner and make it hard for you to get any loan in the future.
Avoid tempting ads
You will see a lot of ads made by different debt relief companies that will promise a lot of things such as:
- Keep away the hounding creditors and the aggressive debt collectors
- Reduce your debts by more than 60 or 70%
- Make you debt-free in a year and so on.
All these may sound very tempting and great and put you in a situation where you wonder who you should sign up with for debt relief. However, tarry a little and give a second thought to it because in most cases such debt relief programs are not as benign as it is portrayed or you think.
Therefore, avoid such companies that make such promises if you do not want your debt relief to become a debt pain in the end. Visit sites like debtquest.com or any other reliable ones to see what they offer, their charged and their track record before you choose a specific program and a debt relief company.
Look for the positives
When you hire a good and reliable debt relief company after thorough research thinks will happen in this way:
- You sign up with the company
- They will negotiate with your creditors for an amount that is less than the original due amount
- They will arrange to pay a lump sum and
- You pay them a specific amount of money every month as a part of your program.
The positives of such a program are that you pay a lower amount, you pay only a single monthly payment and things will become more manageable for you. Well, that is all about the positives of debt relief.
The negatives of it
There are also a few negatives regarding debt relief options. Know about these beforehand so that you are comfortable with what you choose.
- Credit score: Once you enroll in a program it will hurt your credit and for a long time. However, the effect will be different depending on the type of debt relief you choose. If you choose debt settlement and stop making payments, it will hurt the credit score quite fairly but not as much as it would when you choose to file bankruptcy. If you do not pay the entire amount owed to your creditor it will stay on your credit report history for seven years. However, there are ways in which you can repair your credit score but that is a different topic altogether.
- Fees: With any debt relief option there are lots of fees included. A few of these can be quite large and a few of these can be hidden as well. Fees are usually charged as a percentage of the total debt that can range anywhere between 18 and 25%. The fees will be typically included in the monthly payment. However, most companies will not be specific about how much of your monthly payments are towards your dues and how much is deducted as their “service fee.”
- Others: A few debt relief companies may also need loan insurance apart from some upfront fees paid. The upfront fees are the major issue with these debt relief companies as a few of them may even charge you for services that they do not perform and may even keep this money with even settling your debts, ever. To ensure fair practice, FTC banned such fees in 2010 but still, there are a few debt relief companies that continue to charge upfront fees.
- Taxes: If you settle your debt and some amount of it is forgiven by the creditor then this will be considered as your income by the IRS. They will charge taxes on it as per the rates predetermined.
- Lawsuit: It is likely that your creditor may file a debt collection lawsuit against you. The debt relief companies have very little to do in such cases apart from negotiating with the creditors for a waiver. The law will take its own course and the companies will have no influence in its legal proceedings and outcome. At the most, they can only assure that they will try their best to complete the program as quickly as possible so that such lawsuits can be avoided and that is all about that.
Lastly, there is no guarantee that your debt will be reduced by your creditors. Ideally, most of the times, creditors may not agree to even work with a debt settlement company. If debt settlement does not work, it will make your financial situation, increase your debts even more with interest accrued on the outstanding balance and your credit score worse than before. In the end, if the company does not successfully work on your debt, you will be stuck with the additional fees on top of your debt and therefore end up having more debt than you started with.
Pro tip: It is best to do a DIY version of dent relief if you are stuck with your financial condition. Call your creditors up to explain your situations and plans. Chances are they will lower the interest rates, offer a grace period and even put you on a suitable program to pay off your debt.
