Make Debt Relief Your Last Resort
Should you trust a debt relief company? Here’s what we’re watching this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week a question from Caroline:
I have a debt of $ 15,000. Loan consolidation payments will be cheaper at almost $ 160.00 and 42 months later. I believe that once paid, the accounts will be closed forever. It doesn’t bother me, it bothers me if my credit rating will go down when they close? When they repay the loan, do they pay part of the loan, do they make the full repayment?
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Carefully
While it’s hard to say for sure with the limited information you sent, given that 42 payments worth $ 160 are far from $ 15,000 (actually less than half that amount), it looks like you’re talking about paying off debt, not just consolidation. debt. Either way, you need to be careful what you get yourself into.
NerdWallet summarizes the debt settlement as follows: “Consumer finance groups warn very strongly that this is risky, does not work for many people, and can only prolong your financial pain. It will not stop late fees, collection notices, or even threats of legal action while settlement negotiations are underway. ” This can take years.
That’s why. Debt settlement companies will transfer your monthly payments from the lender (say, the credit card company) to a separate savings account, and then use that to negotiate with the lender, once it reaches a reasonable amount, on NerdWallet because “the settlement only offers work if it seems that you will not pay at all, then you will stop paying the debts. ” This means you accumulate late fees, fines and delinquencies that will remain on your credit report for seven years, and possibly a collection effort or lawsuit from your lender. And there is no guarantee that a debt relief company will actually be able to negotiate a lower payment on your behalf, leaving you stranded and possibly even more in debt than before.
As mentioned above, lenders won’t just agree to let you pay off half of your debt and go their own way. You always have to think about what the company that offers you a payment scheme gets out of it – they definitely don’t do it out of the goodness of their soul. As with all financial products, “if it sounds too good to be true, it probably is,” said Ted Rossman, chief industry analyst at CreditCards.com .
“This maneuver is one step to bankruptcy,” says Rossman. “This will have a significant negative impact on the creditworthiness of this person. It’s better than not paying at all, but paying less than you owe has serious credit implications. ”
So yes, paying off debt can hurt your credit history in much the same way as bankruptcy. This is why it should be the last effort on your road to bankruptcy when you have exhausted all other options .
“At the end of the day, the reader asks if she should be concerned about the credit rating impact of automatic account closings after the debt is repaid,” says Rossman. “I would say that this is not the best question because it is fast forward to the end and it is a long road.” Better to think about the credit implications you are experiencing now or in the near future if your habits do not change.
There are better options to try before contacting a potentially fraudulent debt relief organization (and many of them are just scams).
Other options
“I think the reader should be more concerned about the large amount of debt and find a better way to counter it,” says Rossman. “I would advise this person to get a detailed opinion from a non-profit lending institution such as Money Management International .”
If your biggest problem is timely payment, contact your creditors directly to see if you can fix something. Be sure to find out the name and phone number of the agent with the extension number, etc., and take notes of your conversation. Then ask them if there is a way to change your payments, schedule, or interest rate (you don’t have to settle for less than you currently owe). “Lenders such as hospitals and credit card companies sometimes allow such abstinence programs,” says Rossman. CreditCards.com offers :
Summarize the situation. Explain that your financial picture has changed, but you still want to fulfill your obligations. Either ask what the collector or lender has to offer, or suggest your own plan. You may hear “yes”, “no”, or get a referral to another department.
You want to get to a place where you can make affordable payments on time. Get a written agreement.
Other disadvantages of debt settlement
If you do choose the debt settlement route – and again, this should be the last thing you try – here are a few more things to keep in mind, according to the FTC :
- It is illegal to charge a prepayment . You cannot charge a customer until you pay off or otherwise settle the customer’s debts. If you revise a client’s debts one by one, you can charge a commission for each revised debt, but you cannot make upfront payments. You can require customers to set aside money in a dedicated account for your commissions and payments to creditors and debt collectors, but the new Rule imposes limits on these accounts to ensure customer protection.
- You must disclose certain information before subscribing people to your services. Before people sign up, you must disclose the fundamental aspects of your services, including how long it will take them to get results, how much it will cost, the negative consequences that can arise from using debt relief services, and basic information about dedicated accounts. if you are using them.
- You cannot misrepresent your services. The new Rule prohibits you from making false or unsubstantiated claims about your services.
So, if paying off the debt does work – which, again, is not guaranteed – remember that you will have to pay the company a commission, usually a percentage of the debt paid off. “In addition to the fees paid to pay off debt, customers may face other fees, such as setup and monthly maintenance fees for a dedicated account created through the program,” NerdWallet says. The IRS also treats forgiven debt as income, which means you will be taxed on anything you don’t pay, which could mean a surprisingly large tax bill will be issued in April.
Debt consolidation is also wrong. While I can’t say for sure because I don’t have all the relevant information, just be aware that the interest rate you quoted may change and you may not get away with paying less (in fact, you may end up paying more at long run).
To summarize, be suspicious of any company that promises to pay you back. Find a company at the Bureau of Consumer Financial Protection and the Bureau of Business Improvement, or contact the state attorney general or local consumer protection agency to find out what types of complaints they have filed against them; a google search won’t hurt either. And only use this as a last resort.