Too Many Risks to Go With a For-Profit Debt Settlement Company
NEW YORK (TheStreet) -- It seems like a no-brainer: When a problem gets overwhelming, hire a pro to sort it out. Like when your debts snowball out of control.
But not so fast. A study by the Center for Responsible Lending shows that turning to a for-profit debt-settlement company can actually make matters worse.
The center describes the debt settlement option as a kind of leap into the void, and instead of finding a safety net, you could find yourself smashed on the rocks below. That's because these firms typically require that you stop making payments on your debt before they start negotiating with the creditors. If the settlement talks fail, you could well be on the hook for even more payments, penalties and interest.
For-profit debt-settlement firms typically charge fees of 20% to 25% of the debt involved, with credit card debt the most common type of debt covered. The fee is usually due once the firm negotiates a settlement, and is paid even if the settlement later falls apart, which can happen if the consumer gets behind on subsequent payments to creditors. In addition, the debtor may owe federal income taxes on any debt that is forgiven.Also see: 8 Pieces of Advice Grads Will Need for the Rest of Their Lives
If for-profit debt firms are a risky option, what's the alternative? Also see: When It Makes Sense to Take a Loan From Your 401(k) pay down debts that charge the highest interest rates, making the minimum required payment on low-rate debts until the more costly ones are out of the way. For many consumers struggling with debt, the first step is simple budgeting, to find expenses that can be trimmed so more cash can go to pay debts down.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV