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Debt Relief Cons
As with any debt reducing service, there are some cons in partaking in debt settlement
No matter what -debt reducing program you have been enrolled into,
make no mistake your credit score will suffer. However, if you can no longer make your payments and your delinquent account has
turned into a nightmare of collect calls, debt settlement is still a BETTER option than bankruptcy for most people. And because
we believe in transparency and are advocates of consumer's knowledge and understanding, we have broken down the four cons of debt
settlement or debt relief below.
Your credit will suffer. Creditors don't negotiate settlement until customers are already behind in payments, and being delinquent
in payments will directly affect your credit score. However, there are some tricks of the trade to keep your debt from escalating
into more credit damaging territory. Discuss the importance of your credit score with your debt relief company. A lot of times they
can help work out a reduced payment plan, to end future damaging late payment affects. Also, have your debt settlement company
negotiate a paid in full (PIF) letter as opposed to debt settled note, on your account. PIF looks much better to future creditors
than debt settled.
You could get sued. With bankruptcy, creditors have to stop collections efforts as soon as you file. That's not the case with debt settlement. Even when you inform your creditors of your efforts to settle, they most likely will not stop trying to collect the full balance. And some may choose to sue for the full balance. However, most creditors will not sue if they believe you are heading towards bankruptcy, as they would rather collect some of their money, rather than none. However, if you are not eligible for bankruptcy some creditors may play hardball.
There are tax consequences. Debt settlement is taxable if the forgiven balance exceeds $600. For example, if your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability, that you are required to pay the IRS. However, if your assets are less than your liabilities, you can petition the IRS to waive that tax liability.
Debt relief services might be illegal. Laws regulating debt settlement vary greatly by state; however 12 states explicitly prohibit for-profit debt management services from operating or conducting business with any persons residing in these states; Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming.
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