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ON THE MONEY: Avoid debt consolidation firms

September 30, 2018

Let’s assume that you are in debt up to your eyeballs; creditors are calling demanding payment, and you can see no way out of the morass that you are in. Is there any action to take to begin to crawl out of the debt hole that you are in?

First things first, my advice is not to use a debt consolidation or debt settlement firm to resolve your situation. Remember that a debt consolidation firm is a for-profit concern, unlike a consumer counseling firm, which is usually non-profit. A debt settlement firm will tout that they can negotiate with lenders and reduce the amount of debt that you owe. In fact, creditors will sometimes refuse to work with these companies.

Here are the facts about debt settlement firms:

• They will recommend that you establish a bank account that they will manage and make payments from and from which they will extract fees, fees, and more fees.

• In the majority of cases, debt settlement companies encourage you to stop paying your credit card bills. If you do stop paying your bills, you will be subject to late fees, penalty interest and other charges, and creditors will likely step up their collection efforts against you.

• Unless the debt settlement company settles all or most of your debts, the built up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it does settle.

• Using debt settlement services can have a negative impact on your credit score and on your ability to obtain credit in the future.

• If any of your loans are forgiven, there will be income tax consequences, since the amount of forgiven debt is considered as taxable income and will be reported to you on a 1099-C.

• Often these firms will tout a non-existing new government program to reduce your credit card debt, or may even guarantee that they can make your debt go “away.” They may even guarantee that your unsecured debts can be paid off.

The bottom line is that you may wind up deeper in debt by using such a firm, and the only party to the transaction that will be better off will be the firm who got their money from you.

On the other hand, advisors who work for credit counseling firms are certified and trained in the areas of consumer credit, money and debt management, and budgeting. The most meaningful certification is offered by the National Foundation for Credit Counseling. While these counselors are not on a par with Certified Financial Planners ™, they are competent. These credit counselors will usually charge fees for their services that they take out of the payments you make to them.

If you are having trouble making payments on your debts, a credit counselor may be able to help you with advice or by organizing a “debt management plan” for all your debts. Typically, under a debt management plan you make a single payment to the credit counselor each month or pay period and the credit counselor makes monthly payments to each of your creditors.

Usually, a credit counselor will not negotiate any reduction in the amounts you owe – instead, such a counselor will attempt to lower your overall monthly payment. They do so by negotiating extensions of the periods over which you can repay a loan (for example, 5 years) and by getting creditors to lower the interest rates (for example, as low as zero percent) and waive certain account fees.

One thing to remember is that, even if these firms can obtain extensions of time for you to repay as well as a reduction in your interest rate, you could wind up repaying more in total over the entire loan repayment period, since the interest clock keeps ticking until the entire amount is wiped out.

Check out this website: https://www.consumerfinance.gov/complaint.

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