Debt elimination is not a source of debt relief. Although countless companies have gotten consumers to participate in so-called debt elimination programs, they have been proved fictitious. Rather than hand over hundreds of dollars to a company that promises to eliminate your debt by working their special relationship with your creditors, protect your finances and put your money into repaying your debt.
Definition
When a debt consolidation company contacts you, they will tell you that they have the ability to make your debt disappear by providing your creditors certain types of paperwork that eliminate your debt completely. Such companies will tell you that there are loopholes in the system. According to the Better Business Bureau, these companies have many tactics. But at the foundation of each is the idea that credit lines are not legal.
Pitfalls
No document exists that absolves a consumer from his debt; therefore, a debt elimination company cannot actually get rid of your debt. In fact, you may end up with more debt than you started with, since many debt elimination companies charge hefty up-front fees to "process" your paperwork. Bankrate writer Steve Bucci explains that debt elimination is like trying to lose weight by fasting: It doesn't work, and you end up injuring yourself further in the process.
Considerations
Consumers who decide to work with debt elimination companies will not see any reduction in their debt, and their credit scores are likely to take a hit. In particular, if a debt elimination company tells you to stop making payments on your debt, your score will plummet. Your payment history and debt utilization ratio are two of the biggest factors in calculating your credit score. Damaging your credit score may make it difficult to obtain loans and new credit down the road.
Other Solutions
Rather than fall deeper into debt, consider taking advantage of actual debt solutions, such as debt consolidation or credit counseling. With a debt consolidation loan, your bank or credit union lends you a lump sum so to wipe out your current debts, so you end up making one monthly payment. It's vital to research interest rates before settling on a debt consolidation loan, as they are often advertised at very low rates that are available only to those with excellent credit. Credit counselors will help you to solve the root of your financial problem by working with you to create a budget and payment plans. If you have defaulted on payments or are having trouble making minimum payments each month, a credit counselor may recommend a debt negotiation plan (DMP). Under a DMP, your counselor works with your creditors to lower your interest rates or pay off balances. The Federal Trade Commission recommends working only with reputable credit counseling companies listed on the National Foundation for Credit Counseling website.
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