Questions About Debt Consultation

Your debt may have spiraled out of control if you are seeking help from a credit counselor or debt management consultant. You want answers for solving your debt problems, and the best way to accomplish that is to ask lots of questions. Debt consultation can lead to a fresh start--or make things worse. Sometimes people saddled with debt fall prey to unethical debt counselors who talk a good game but fail to deliver. That's a key reason why you should understand the pros and cons of any debt management plan before enrolling.

Credit Score

Ask the counselor or consultant how your credit score will be impacted by your participation in debt settlement, debt management, bankruptcy, or whatever program you are considering. Ask if your credit score will go up or down once you enroll in the program. Typically, credit scores fall as you restructure debt but rise again once you start to show progress. Ask how the fluctuation will affect your ability to buy a house, car or take out a loan for other reasons.

Credit Report

Also ask what negative entries, if any, will be included on your credit report as you start to restructure your finances. For example, debt settlement, which allows you to settle debts for less than the full balance, can lead to a slew of negative entries. Creditors and debt collectors may direct the credit bureaus to update your credit report to indicate that accounts you resolved were "settled for less than the full balance." That could make getting new credit difficult, at least for a while, as creditors fear you might default on other accounts as well. Ask how long negative entries will remain on your report. Federal law allows bankruptcies to remain on your report for 10 years, and other negative information--including settlements--can remain for seven. Ask your counselor how these entries will affect your ability to be approved for new credit.

Tax Liabilities

Ask if your debt workout plan will lead to a higher tax bill. For example, debt settlement could result in the Internal Revenue Service treating any savings you realize as income. For example, a $20,000 credit card debt settled for $10,000 would prompt the IRS to add $10,000 to your gross income for tax purposes. That could lead to an additional tax liability of a few thousand dollars, depending on your tax situation.

Costs

Ask how much debt consultation and a debt workout plan will cost you. Debt settlement, bankruptcies and other debt workout plans can be expensive because of fees charged by counselors, consultants or attorneys. Debt settlement firms, for example, collect their monthly fees before paying off any of your debts. The Federal Trade Commission says that can lead to thousands of dollars in fees--money that could be going to your creditors if you handled your debt collection on your own.