The Top 5 Debt Settlement Traps That Harm Your Ability to Get Out of Debt
Plenty of debt settlement companies will promise you a clean credit rating and an end to all of the hassles caused by out-of-control debt. Beware, though, because some of those debt relief companies aren't telling you the whole story. Instead, they're setting you up for a fall into a debt settlement trap.
Debt settlement trap 1: Poor credit scores
A lot of debt reduction companies promise you an untarnished credit rating. Most of the time, this promise is just marketing hype. A common practice for debt settlement companies is to put off credit card companies and collection agencies while you scrape together the funds for a settlement.
While you're getting the money to settle, your creditors are faithfully submitting reports to the credit agencies. Once you're ready for a settlement, you'll have established a clear track record of non-payment, and your credit rating will have plummeted.
Debt settlement trap 2: Robbing Peter to pay Paul
When you work with a debt settlement service to get out of debt, that service might ask you to stop sending your monthly credit card payments to the credit company. Instead, they want you to send your payments to them. After taking out their fees, they assure you that your money is being held for a one-shot settlement.
Debt settlement trap 3: Non-refundable fees
If you change your mind about seeking debt relief with a debt settlement company, it may cost you. The fees that a debt settlement company charges are often non-refundable, and they'll put you further in debt than you were before you used the service.
Debt settlement trap 4: Unrealistic benefits
The benefits of debt settlement are often beyond belief. Which credit card companies are going to forgive half of the principal balance on their books? The ones that are going out of business. Real debt relief is not a magic wand.
Debt settlement trap 5: Get out of debt, but pay more taxes
If you do get a portion of your credit card bills and other debts written off as part of a debt settlement, you may be responsible for the taxes on the portion of the debt that's written off. Ouch.
Overall, you may be better served by debt counseling or a debt management company. Instead of putting off your creditors and damaging your credit rating, these companies negotiate a "reset" of your debts, which drops your interest rates back to normal and wipes out existing fees.
Protect your credit, and get out of debt the smart way. Get a copy of your credit report, and enlist a reputable debt counseling company to help you with your situation. Once you're on your way to improving your credit situation, make sure you stay on the right path.
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