From time to time a prospective client will come to me with lots of Credit Card debt. They want to know what they can do to get out of debt? My answer is always the same. There are no short cuts.
Every time they will ask if they should use one of the debt-settlement companies that you see on TV. You know the ones that promise financial freedom. What most of the companies do is convince you to stop making payments to the creditor. Some have you send the money to them to hold while they try and negotiate with the creditors to take a lump sum for less than what is owed. On the surface it seems like a good idea. Why wouldn’t the creditor want to negotiate for something now, rather than writing off the debt completely.
But reports from the Center for Responsible Lending and the Federal Trade Commission point out that debt balances increase on average by 20% when stopping payments from a debt-settlement strategy.
Here are somethings they point out in their report:
-Stopping payments to creditors will likely cause penalties, late payments, and higher interest rates.
-Relief programs are not always quick. Some can take three or four years.
-Compare the cost to the Debt Settlement program with the increase in fees, as it will affect the amount of savings from the strategy.
-Note that the IRS views the savings as taxable income, so you may have to pay additional taxes.
-A creditor does not have to negotiate. They may decide to file legal action to get all the money owed. This could end up negatively affecting your credit score.
Your Smart Money Move to getting out of debt is to do the hard work of following a budget, cutting expenses and increasing payments to your creditor; and staying away from the debt settlement plans.