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Are Debt Relief Companies Worth It?

Today we’re going in-depth about debt relief companies. You may wonder if they are ideal for you and can truly help.

What is a Debt Relief Company, Exactly?

Debt relief companies are private companies that act as middlemen between you and your creditors to negotiate deals with them. Some of them get your creditors to agree to monthly payments, and some of them have you set up an account where you make deposits monthly. Once you’ve deposited enough money, then they will settle with your creditors. Generally, they only work with unsecured debts, so it would be things like credit cards, medical bills, payday loans, or personal loans. They typically don’t work with debts like student loans or taxes, so if you have any of those types of debts, even if you do work with a debt relief company, you will have to deal with those other debts on your own.

How Much Does it Cost?

How much you have to pay a debt relief company depends on how much debt you have that they are handling for you. The more debt they handle, the higher the payment is. It’s up to you to figure out how to make that payment work with the rest of your household budget. How much you’ll have to pay them to help you also depends. Sometimes they charge an upfront fee to set up accounts and start working with you. Most of them also take a portion of every monthly payment that you make as part of their fee for doing the negotiating, settling, and transferring the payments to the creditors.

Keep Your Credit Score in Mind

One thing to think about is how will working with a debt relief company affect your credit, because any time you make a payment that’s different from the original contract payment, your credit score is going to take a hit, whether the debt relief company negotiates a one time lump sum settlement for you, or whether they set up a payment plan for a total that is less than the total amount you would otherwise owe. If your creditors don’t agree to the debt relief company’s terms, which since it is a completely voluntary program, they don’t have to agree to it, you may also still have to deal individually with some of your creditors. That also means that your creditors still have all of the remedies they have otherwise in law such as taking you to court and getting a judgment against you for that debt if they don’t agree to the debt settlement plan.

Potential Tax Considerations

What happens to the debt that you don’t pay can also be a consideration, because under the tax code, any debt that a creditor forgives becomes taxable income to you. The creditor will have to send you a 1099 for that income that works just like a 1099 from any employer for the IRS’ purposes and becomes income that you have to declare on your income taxes.

Depending on the amount, it may change your tax picture. It would be a good idea to talk to a tax professional before you enter into any payment plan that agrees to pay less than the balance, so that you don’t get a surprise at the end of the year.

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