The Negative Consequences of Using Debt Relief

Consumers struggling with debt sometimes look to credit counseling and debt relief programs for assistance. For some consumers, these options can be a good solution to their debt struggles. But debt relief programs aren't right for every consumer, and do sometimes come with financial risks. Before signing up for a debt relief program, it's critical to be aware of some of the potential consequences of going this route.

Basics

Debt relief is usually a form of credit counseling where a financial advisor provides help to a consumer struggling with debts to working out a budget and reduce the amount they owe. Debt relief agencies work with creditors to develop a payment plan and lower interest rates if possible. Debt relief agencies can also help consolidate payments, which help consumers stay organized and more likely to make payments on time. Debt relief can be a solution to severe debt challenges for some consumers.

Fees and Taxes

Debt relief is usually not free. In exchange for negotiating with creditors and providing advice, debt relief agencies usually charge consumers a small fee. Sometimes, consumers are able to request a waiver for counseling fees. It's important to ask a debt relief agency about all of the fees they charge. Additionally, debt relief might result in higher taxes for those who get help. This is because debt cancellation is considered to be income under federal tax law.

Bankruptcy

A potential negative consequence of using debt relief is bankruptcy. This is because some debt relief programs use bankruptcy court as a method to resolve debts and work out payment plans with creditors. Bankruptcy can result in the liquidation of the consumer's assets and serious damage to their credit rating. In some serious cases, this may be the only option. But often consumers can resolve debt and avoid bankruptcy, even when a debt relief agency claims they cannot.

Scams and Fraud

Unfortunately, many consumers have found themselves the victims of fraud associated with debt and foreclosure relief. Usually, these scams offer assistance with debt in exchange for a small fee, only to keep the fee and leave your credit situation unchanged. To avoid a potential scam, it's important to work with credit counselors with a good reputation. Legitimate debt relief and loan modification programs rarely charge fees until after they've brokered agreement with creditors, so steer clear of those that do.