We’ve all seen the commercials on TV for companies that offer “loan loans” or “debt adjustment” services for people who are overwhelmed by debt.
For consumers who feel they are in over their heads, hearing the words “debt relief” may seem like the answer. But there is no such thing as a magic wand to get rid of debt. While debt settlement companies often advertise that they can negotiate with creditors to reduce the amount owed to consumers, working with them carries potential long-term risks.
The Consumer Financial Protection Bureau (CFPB) has compiled a long list of potential legal and financial risks associated with debt settlement companies, which include:
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- Consumers are charged high fees – sometimes up to 25% of their total loan balance – even though in many cases, companies may not be able to pay all their debts.
- Potentially negatively impacts the consumer’s credit score and hinders the consumer’s ability to obtain credit in the future.
- Some lenders refuse to work with debt settlement companies that consumers choose.
- Consumers are encouraged to stop paying their credit card bills, even though doing so could result in them incurring penalty interest, late fees and other fees — likely causing creditors to raise on their debt collection efforts, to the point of filing lawsuits.
- Consumers are instructed to transfer money to a bank account managed by a third party, where they can make payments.
- Consumers fall prey to scams, as some debt settlement companies falsely claim to be government-affiliated or nonprofit organizations. Some may try to avoid fee regulations by encouraging people to sign up in person or online.
If a consumer stops paying their mortgage, they may incur late payments on their credit card accounts and loans, and their annual percentage rates (APRs) may increase. And every time a consumer misses a payment, their credit score can drop and their credit report can show nonpayment for seven years.
Additionally, any amount forgiven through debt settlement companies can be considered income – which people can hit in their wallets on Tax Day.
Financially healthy options for debt management
As we saw above, the CFPB outlined several reasons why debt settlement companies may abandon consumers. more debt, not a small one.
There are several different alternatives to working with companies that offer direct debt relief. Although these options do not claim to eliminate debt, they can help consumers pay off their credit card and other debt, while managing – rather than reducing – their credit scores and profiles.
1. Apply for a personal loan.
Consumers can apply for funding to meet expenses and debt consolidation online through lending platforms like Prosper, where I am the CEO. Personal loans between $2,000 and $50,000 as offered through the Prosper platform have a fixed rate for a specific period of time (two, three, four or five years) and no prepayment penalties, so it can be paid immediately.
They also give borrowers the flexibility to choose the option that works best for them, checking loan rates and eligibility doesn’t affect consumer credit scores – and if approved, the money goes straight to consumer bank accounts.
While personal monthly loan payment amounts may be higher than what debt settlement companies require, the loans themselves are designed to help consumers manage their situation and improve their overall health. finances.
2. Work with nonprofit credit counselors.
A certified, not-for-profit credit counselor can work with a consumer to help develop a debt management plan. But that’s not all — they can also provide services for improving credit scores and better managing personal finances, such as creating effective budgets or sitting down to review credit reports and offering tips on raising scores. Most nonprofit credit counseling services are available free of charge; Lists of certified counselors can be found at www.NFCC.org or www.ConsumerCredit.com.
3. Negotiate with the creditors themselves.
Credit card companies and other lenders would rather have consumers pay something than nothing. Reaching out to creditors themselves to negotiate a new payment schedule or rate can go a long way in helping consumers pay off as much debt as they can, while alleviating aggressive lenders. creditor collection efforts.
4. Meet with a bankruptcy attorney.
A bankruptcy attorney can help consumers understand whether bankruptcy is a viable option for them under the law. Some bankruptcy attorneys offer advice to potential clients in initial meetings for free.
Credit can be a helpful tool if it is used properly. With the power of education, consumers can find the best way to strategically reduce their debt without seriously damaging their credit in the long term.
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This article was written and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can check advisor records using DECLARED by SEC or with FINRA.