• The Hidden Dangers of Debt Consolidation and Debt Settlement
  • September 11, 2012 | Author: James R. Meizanis
  • Law Firm: Tully Rinckey, PLLC - Your Lawyers for Life - Arlington Office
  • Debt consolidation or debt settlement may seem like an attractive option to individuals facing the burden of debts with multiple creditors. While consolidating your debts may give you the convenience of making a payment to one source rather than multiple creditors, you should be mindful of the potential downfalls.

    Debt consolidation may mean paying more money in interest while paying off your debts. If your situation is that your debt balances are rising due to late or missed payments and interest accumulation, you will likely be unable to receive a favorable interest rate when consolidating. Since you may be deemed a credit risk when forming the consolidation loan, you will likely be facing a high interest rate in consolidation.

    Debt consolidation may also mean extra costs. These extra costs may come in the form of servicing fees from the debt consolidation company. The Federal Trade Commission (FTC) has limited how fees may be charged by debt relief agencies, but there is still an opportunity for these companies to collect fees, which add to your overall costs.

    Debt consolidation or debt settlement companies may also be disreputable. Unfortunately, there are companies that may take advantage of individuals who are stressed with the burden of their debts and collect fees without providing the relief you thought you would get. There are certain agencies and protections in place to try to protect consumers from these types of companies. For stressed consumers though, it may be difficult to avoid these traps.

    With regard to debt settlement, consumers should realize that this will still likely mean an adverse affect on your credit score. Debt settlement means that the creditor has agreed to receive less than what you owe for a particular debt. Even though you may be thinking that you are making good on a certain debt, the reality is that if a creditor accepts less than your obligation under the credit agreement your credit report will contain a negative notation. This negative notation may mean a lower credit score.

    As with any service provided by a company, you should know what you can expect to receive, how much it will cost, and when you will get it. There is a potential upside of eliminating debts or consolidating them into one payment, which may be attractive to consumers. You should evaluate all of your options when faced with insurmountable debt. Consulting with a bankruptcy attorney to find out if bankruptcy is the right option for you should be something that you seriously consider when planning how to address your debts.