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Beware of working with debt consolidation companies

On Behalf of | Jan 5, 2015 | Bankruptcy |

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Working with debt consolidation companies can make your bad financial situation even worse.

If you have gotten behind on your bills, you can be put in a desperate financial situation, one that you would do almost anything to dig yourself out of. As a result, many people in this situation are tempted to work with debt consolidation companies that promise to settle debts for fractions of what is owed. Although these promises are tempting, in most cases, trying to address your debt problem in this manner puts you in a worse financial situation in the end.

Debt Consolidation Companies Fail To Help

According to the Federal Trade Commission, debt consolidation companies do not deliver on their promises 90 percent of the time. The reason that the failure rate is so high is because of the dubious tactics these companies use.

For one, just about all debt consolidation companies ask their clients to stop making payments on their debt. The idea is that by doing so, the company will be able to use the nonpayment of debt to persuade the client’s creditors to accept less than the full amount of debt owed as payment in full. Unfortunately, in reality, there is no law that says that creditors have to work with or reach a deal with debt consolidation companies.

Because this is the case, once the debt payments are stopped, the client of the debt consolidation company suffers, because they get hit with interest and late fees on their debt, causing it to grow. Additionally, since no payments are being made, creditors may decide to file a lawsuit or begin foreclosure or repossession proceedings to collect the delinquent debt.

In addition, the client’s debt grows significantly just by hiring the debt consolidation company. These companies often charge exorbitant fees, often as high as 20 or 30 percent of the debt owed. Sadly, this fee is owed regardless of whether the company delivers on its promises to reduce its client’s debts.

Even if the very few instances that the company is successful in reducing the debts, the client’s finances also take a hit. Since any forgiven debt is taxable under the law, the client can face a hefty tax bill, which adds insult to injury to a situation that is already tenuous financially.

Speak to an attorney

If you have debts that you cannot hope to pay back, it is generally better to file bankruptcy than to work with debt consolidation companies. Once you file bankruptcy, all collection calls, lawsuits, repossession or foreclosures are immediately stopped. During the process, most of your debts are wiped away tax-free, giving you the ability to start over with a clean slate.

In addition to bankruptcy, your may be able to reduce your debts through debt negotiation. However, using an attorney rather than a debt consolidation company can ensure that your creditors are legally bound to honor their agreement to reduce your debt.

To find out the best way to proceed, speak with an experienced bankruptcy attorney before your financial situation gets worse. An attorney can listen to your personal circumstances and recommend the best option to get you out of your sticky financial situation.



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