For some, moving ahead with a debt relief company is an unavoidable last resort if bankruptcy is looming. Before moving ahead with this choice it is important to understand the risks that accompany it and how to lessen any future issues.
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While the risk of complete financial bankruptcy is real, it is important to understand other negative outcomes that come with the choice to undergo the process of debt relief.
You should prepare to spend some extra money during the debt settlement process. These tend to include balance transfer fees, closing costs and origination fees. It is typical for settlement companies to charge up to 25 percent of your debt in fees and additional costs.
During the process of debt settlement, you are required to stop making payments to creditors which negatively impacts your score. On top of this, any settled debts will stay on your report for up to seven years, making it challenging for you to borrow money in the future.
While the role of the company is to handle negotiation of your debt, you will not have the ability to decide the amount that you pay for this negotiation to occur. This downside means you could end up spending an excessive amount of money, outside of your control.
Any amount of money that is settled in the process is then seen in the eyes of the IRS as taxable income. This means that, in some cases, you will owe taxes on that amount of money in the same way you have to pay taxes on earned income.
Keep in mind:If you have settled more than $600 worth of debt, your lender will give you a 1099-C to fill out.
Although running into legal issues is a possibility when it comes to any financial endeavor, the risk that comes with working with a debt settlement company is slightly higher. The job of the debt settlement company means that your best interest is not always top of mind, which makes possible legal trouble more common.
Before moving forward with a debt settlement company as the last ditch effort, consider some alternatives that could help you settle your debt, better your finances and avoid potential risks.
Unfortunately, scammers prey on folks that are in a precarious situation as they know that many seeking debt relief are desperate for help. Come equipped with the knowledge that these scams are common but easy to avoid. Look out for these red flags.
Looming bankruptcy is scary, and the choice to work with a debt settlement company is the right move for some. But before doing so it is important to remember the risks that come with it. Prepare for: steep fees, a hit to your credit score, lack of negotiation, possible high taxes and potential legal issues.
Finally, when looking for a debt settlement company, look out for common scams. If a representative sounds too good to be true, it probably is.