If you’ve been speaking with a debt settlement company, you may have heard some fantastic claims. It’s not uncommon for debt settlement firms to lure potential clients in with promises of reducing their debt by 50 percent. Some claim they can help you eliminate your debt problems within 36 months. In many cases, however, these debt settlement companies aren’t selling anything more than snake oil.
Although some debt settlement firms will deliver on their promises, in some cases, the process of getting you a favorable debt settlement may not entirely clear-cut or easy. There are some real risks associated with the process.
- It will hurt your credit rating. Your credit card accounts could become delinquent when you start paying your money to the debt settlement firm. These delinquencies will stay on your record for seven years.
- Your accounts will get hit with interest and penalties. Interest on your debts will skyrocket, and your debts will have large fees applied to them.
- There are no guarantees. Some credit card companies and banks will refuse to negotiate with a debt relief firm. It’s not unfeasible for your debt relief company to not get you even a single discount.
- It only works in certain situations. The Center for Responsible Lending reports that the majority of consumers will have to settle approximately for debts before they will receive any net benefit from the process.
- You’ll pay fees. Your debt settlement company may charge numerous fees and expenses for managing your account each month.
- You might get taxed. When debt gets forgiven, the IRS could tax you on the money owed that was forgiven.
Before working with a debt settlement firm, consumers are encouraged to understand the legal aspects of the agreement they are entering into with the debt settlement company. Fully understanding the agreement and investigating alternative debt resolution options, like bankruptcy, could save borrowers a great deal of money and headache.