For those struggling with money management, bankruptcy is often the very last resort. Thus, debtors are constantly looking for other solutions to get their debt under control. Many of these options include credit counseling, debt settlement, and mortgage modifications. While these are all great solutions to a debt crisis, they all involve hidden dangers that can make financial matters worse. Grand claims such as “Eliminate up to 70 percent of your debt!” make debt settlement an appealing option, but is it really better than a bankruptcy?
Why Debt Settlement Isn’t Always the Answer
The process of debt settlement involves a 3rd party – a debt settlement company – that acts as a liaison between you and your creditors. You explain your financial predicament to the company, provide your creditors, and they’ll help you reduce your debt as well as your monthly payments. Instead of sending payments to your lenders, you send them to the debt settlement company. The settlers are able to do this because they put your payments into a savings account before negotiating a settlement with your creditors. The fee you owe the settlers could be a flat-fee, hourly rate, or percentage of the cancelled debt.
However, debt settlement isn’t always the best money management option. The dangers include:
· Spending more money unnecessarily. With so many money management options such as a bankruptcy, loan modification, refinancing, and much more available, a debt settlement might make you pay more than you would pay otherwise. While it may help you reduce debt, it might not be the most cost effective solution. Whenever considering the money management options available, always analyze the amount of money you’re rerouting to a 3rd party.
· Tax considerations. Even though debt may be forgiven through a debt settlement, this money management option doesn’t take taxes into consideration. In other words, you still owe taxes on the forgiven debt. Ouch.
· Damaged credit score. Because of the way debt settlements work (settlers collect payments for months before negotiating a settlement), late and unpaid payments will be reported to the credit bureaus. So while you’re waiting for your debt to be eliminated, your credit score is dropping.