Thursday, September 16, 2010

Why Debt Relief Is Bad

Debt relief programs offer promises of lower bills and financial freedom. Unfortunately, participating in a debt management program is not only good news. If you choose to explore the various debt relief options available to you, take note of some of the negative consequences you will face.

Fees & Costs

    Paying a professional service firm fees for its time and expertise is not unreasonable. Debt relief firms of all types need to generate revenue from the services provided to pay their overhead and service their own obligations. Nearly all debt management and relief programs come with a fee structure. Paying fees is not necessarily a bad thing, but often those fees are more funds coming out of your pocket that could be better used toward paying down your debt. Be prepared to pay administrative and program fees or be asked to make voluntary contributions -- which sometimes you have to opt out of -- to your debt relief provider.

Restrictions on Credit Usage

    Debt relief programs aim to help you lighten your debt burden as well as put you in a position to make timely payments on your outstanding credit balances. Ultimately, these actions will have a positive effect on your credit score. However, while enrolled in the program, you may experience difficulty, or be prohibited from, opening new credit accounts or taking on a new loan. If creditors are making a concession by offering you lower rates or negotiated balances, they will often stipulate that you do not open new accounts.

Questionable Tactics

    Various forms of debt management and relief programs are available. It is important to understand how each category of program works to make the best decision for yourself. For instance, when it comes to debt settlement or debt negotiation firms, many consumers are surprised that the provider forces reduced settlements with the creditors by asking you to stop making payments to the creditor. Sometimes you have to force the hand of the other side, but you may have ethical or moral concerns about not paying your bills or participating in the program as outlined by the debt relief group.

Damaged Credit Score

    Particularly if you choose debt negotiation as your debt relief path, at the conclusion of the program, you may find you credit score and report to be in worse shape than when you began the program. Once you cease making payments or end up paying less than you actually owed as part of a settlement offer, these negative remarks remain on your credit report for up to seven years. You may have saved some money by seeing reduced balances, but your damaged score may cause problems for you in the future when trying to buy a home or car and obtaining the most favorable financing available.

Lesson Not Learned

    If getting out of debt via a debt relief group is too easy, you may walk away from the situation without feeling any real pain or learning anything new about managing your finances. Ideally, it would be best to pay off the monies you borrowed without the assistance of third parties or aggressive negotiation techniques. That may not be realistic. But if you do not take immediate steps to take control of your finances, you may find yourself repeating your mistakes, racking up your debt and not having as many debt relief options available for your second effort.

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