If you are an American and are under the age of sixty, then chances are that at some point in your life you have incurred an outstanding debt. Unfortunately, debt is a looming specter that can easily affect and even ruin the lives of people from all walks of society. Debt can materialize as a result of everything from mortgage delinquencies, to credit cards payments, to student loans defaults, to health insurance bills. As the number of Americans living with debt continues to expand (approximately 25% according to most surveys) so does the market for debt settlement and consolidation. Many companies arise beneath a façade of benevolence, claiming that they are there to help you reduce debt faster and that they have only your best interests at heart.
Unfortunately, this is rarely, if ever the case. The fact of the matter is that debt settlement companies are just that—companies; meaning that they necessarily have special interests in financial gain in ‘helping’ you to resolve your own financial situation. In addition, although there are both pros and cons to working with these companies, the fact of the matter is that the cons far outweigh the pros and that these companies have something to profit in aiding you should always be in the back of your mind when dealing with them.
When you negotiate with debt settlement companies, they essentially transfer the debt so that you are no longer paying the creditors but paying them instead. One of the most common problems that arise when dealing with debt settlement companies is that very little of the money you pay will actually go toward paying off your debt; that which does not go toward interest will be taken by the settlement company for service and collection fees. When you start working with one of these companies, the payments you make behave as a sort of bank or kitty and depending on the settlement company, a ranging number of your first payments are amassed and pocketed directly and completely by them.
Another thing that these companies do not tell you is your credit and credit score may actually become worse as a result of their having ‘settled’ your debt. For one thing, in the early stages/months of your payments to the settlement company (those payments which merely accrue and then are filtered directly to the company), the creditors nonetheless consider to be delinquent. This in effect, lowers your credit score. Another thing is that the IRS may charge you taxes for having settled debt via an agency. If you must seek a settlement company, make sure that they send you a 1099-C form.
Moreover, as if all this were not enough, if a settlement company assists you in closing your debt, your credit record will not reflect it. In fact, less-than-flattering information about your debt will remain on your credit score as it is most likely to appear as a “paid-settled” as opposed to “paid-in-full.”
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