Why not to do debt relief?
Cons of debt settlement
Stopping payment on a debt means you could face late fees and accruing interest. Additionally, just because a creditor agrees to lower the amount you owe doesn't mean you're free and clear on that particular debt. Forgiven debt could be considered taxable income on your federal taxes.
Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit 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 settles.
Downsides of debt forgiveness
Forgiven debt of more than $600 may be considered taxable income, potentially resulting in a hefty tax bill. Engaging with debt relief companies could lead to additional fees, exacerbating financial difficulties.
- A DRO will hurt your credit rating and remain on your credit file for 6 years.
- If your circ*mstances change within the 12 months, your DRO may be revoked and you'll have to look at new solutions to repay your debts. ...
- You can't apply if you've had a DRO or other form of insolvency within the last 6 years.
Credit card debt forgiveness could hurt your credit
You stop making payments to your creditors as you save for your settlement. Creditors typically report the debt as "settled" rather than "paid as agreed" on your credit report once it's paid off. This shows that the creditor wasn't able to collect on the full debt.
Yes, you can buy a home after debt settlement. You'll just have to meet the lender's requirements to qualify for a mortgage. Unfortunately, that could be harder after you settle debt.
While you can still use your open credit card accounts after debt consolidation, consumers should do so with caution. If you do use your credit card after debt consolidation, be sure to pay off your balance regularly.
Are debt consolidation loans a good idea? Some of these loans require you to put up your home as collateral. If you can't make the payments — or if your payments are late — you could lose your home.
Debt relief can be a lifeline to help you get out from under unaffordable debt—but it can also damage your credit. So, if you're considering a form of debt relief, you'll want to bear in mind its effect on your credit report, where the information can stay for up to 10 years.
What debts Cannot be forgiven?
Loans, medical debt and credit card debt are generally all able to be discharged through bankruptcy. Tax debt, alimony, spousal or child support and student loans are all typically ineligible for discharge.
But the harsh truth lies somewhere short of "totally erased" and "no consequences." To be clear, debt forgiveness does exist, and it's possible to settle your debt for less than what you owe. But to get it totally erased is rare, and it usually requires an extreme measure, such as bankruptcy.
Debt settlement programs and bankruptcy both have the potential to result in forgiven debt, but they're also likely to have a significant impact on your credit score and your ability to borrow.
Debt Settlement Tax Consequences
The IRS considers any debt cancelation of $600 or more as additional income — and taxable — even if you didn't actually receive any money.
Bank accounts
After a DRO has been approved, your bank may stop letting you use your current bank account. If this happens, speak to your debt adviser to find out what options are available. Your debt adviser may be able to help you set up a new bank account which is not related to any of your debts.
Debt relief companies are for-profit businesses that charge you to negotiate with your creditors (the lenders you owe money) on your behalf. Their goal is to get creditors to accept less than the full amount you owe in exchange for settling the debt.
- Opt for debt relief. One powerful approach to managing and reducing your credit card debt is with the help of debt relief companies. ...
- Use the snowball or avalanche method. ...
- Find ways to increase your income. ...
- Cut unnecessary expenses. ...
- Seek credit counseling. ...
- Use financial windfalls.
Most negative items should automatically fall off your credit reports seven years from the date of your first missed payment, at which point your credit score may start rising. But if you are otherwise using credit responsibly, your score may rebound to its starting point within three months to six years.
The debt will likely fall off of your credit report after seven years. In some states, the statute of limitations could last longer, so make a note of the start date as soon as you can.
| Company | Forbes Advisor Rating | BBB Rating |
|---|---|---|
| National Debt Relief | 4.5 | A+ |
| Pacific Debt Relief | 4.1 | A+ |
| Accredited Debt Relief | 4.0 | A+ |
| Money Management International | 4.0 | A+ |
Will Debt Relief hurt my chances of buying a house?
For instance, hiring a debt settlement company can leave you with severe credit damage and no spare cash, both of which make it harder to qualify for a mortgage. Once your debts are settled, you might need a few years to recover and become eligible for a conventional (meaning not government backed) mortgage.
Debt settlement, when you pay a creditor less than you owe to close out a debt, will hurt your credit scores, but it's better than ignoring unpaid debt. It's worth exploring alternatives before seeking debt settlement.
Freedom Debt Relief is accredited by the American Fair Credit Council and the International Association of Professional Debt Arbitrators. The Consumer Financial Protection Bureau received 120 complaints in 2022 about Freedom Debt Relief. The company gave a timely response to all but two complaints.
If you can afford to pay off a debt, it is generally a much better solution than settling because your credit score will improve, not decline. A better credit score can lead to more opportunities to get loans with better rates.
- Make a list of all your credit card debts.
- Make a budget.
- Create a strategy to pay down debt.
- Pay more than your minimum payment whenever possible.
- Set goals and timeline for repayment.
- Consolidate your debt.
- Implement a debt management plan.
