Many companies offer debt negotiation services and claim they can settle your debts for significantly less than you owe. These offers may be appealing if you have more debt than you can handle, but this approach comes with risks. Debt negotiation companies encourage you to send your money to them instead of keeping up with your regular payments. They say they will save your money for lump sum pay-offs while they negotiate with your lenders. However, your lenders are under no obligation to negotiate with these companies.
Increased Debt
Debt negotiation companies charge fees for their services. You will pay these fees regardless of whether the company succeeds in getting your debts reduced. Additionally, during the time you are saving and paying the debt negotiation company instead of making payments on your debt, your debt is still accumulating interest. You may also be charged additional missed payment fees by your lender. This means that if your lender doesn't negotiate you can end up facing a larger debt than when you started.
Legal Action
Once your account is delinquent, your creditors have the right to sue you for the debt. Once they get a judgment from the court, they will have a variety of tools available to collect the debt. These include garnishing your wages, placing a lien against your home or property or even seizing your personal property to pay the debt, depending on the laws of your state.
Damage to Credit Score
Your creditors will report your account as delinquent once you stop making payments. Having multiple accounts reported as late will quickly drag your credit score. Judgments against you will always have a significant negative impact on your credit score. Finally, if the debt negotiation company succeeds in getting your creditors to settle your debt the account will likely be reported as such, which is another mark against your credit score.
Scam Companies
Some debt negotiation companies are actually scams and will take your money without negotiating with your lenders at all. The Federal Trade Commission (FTC) charged two companies in 2004 for fraudulent practices and warns consumers to be wary. Some companies make fraudulent claims about the amount of money they can save consumers and the risk involved. The FTC also reported that in some cases the companies did not even contact the consumer's lenders for negotiations.
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