What is the process of a debt consolidation company? – Ashcroft Cache Creek Journal

When a creditor agrees to take less than the total amount of debt you owe in full payment, it’s called debt settlement. Plus, you won’t be harassed by debt collectors or threatened with legal action because the obligation has been met.

When it comes to debt relief agencies, or “debt settlement companies,” their services can be expensive, even beyond the hefty fees they charge.

What do debt relief companies actually do?

You pay a fee to a debt relief company to negotiate on your behalf with your creditors. In exchange for settling your debt, creditors will accept less than the full amount you owe.

Many of these companies such as Canada’s Debt Relief claim to be able to significantly reduce your debt. Although it sounds nice, the practices used by debt reduction companies with vendors can have a devastating effect on your credit score. Here are some hard facts about how they work:

Before speaking with your creditors, debt relief companies often ask you to stop repaying your debts and instead make an agreed monthly deposit into a savings account they have opened for you. often for a fee. Before approaching your creditors, you will have made a few payments into your account. Then the debt reduction company will represent you and argue that it is in your best interest to settle some of your debt with them rather than risking any payment. The implicit threat is that you are at your wit’s end and lenders may not be able to collect everything you owe them if you declare bankruptcy.

You may also be charged a fee if the debt settlement company is successful in negotiating a reduction in your debt and paying you the reduced amount on your behalf.

Is debt settlement a dangerous option?

Several factors make debt settlement a risky proposition:

You will have to pay for the debt settlement. There are costs that debt relief companies charge for debt settlement, and these costs can quickly add up over time. For federal tax purposes, if a debt settlement agency is able to get your debt forgiven, the amount they reduce may be considered income. Depending on your income, tax rate, and available deductions, you may need to repay at least some of the debt that was forgiven the IRS.

Debt settlement can have a negative impact on your credit history. Your missed payments may be noted on your credit report if you have stopped payments as advised by your debt settlement company. Missing a certain number of payments will have a significant impact on your credit score, as payment history is the most important element. Failure to make timely payments could result in creditors suing you for unpaid debt or selling your debt to collection agencies. Collection accounts appear as a stain on your credit report.

A debt relief company can also help you reduce your debts by negotiating with your creditors, which will appear as “resolved accounts” on your credit report for up to seven years after they are paid off. A resolved account will appear on your credit report as a negative event, even though it is less serious than a bankruptcy or foreclosure. As a result, some lenders may reject applicants whose debts have been resolved on their credit reports when applying for a loan.

Debt settlement is not always successful. A creditor’s agreement to reduce your payment obligation is not guaranteed. Even if they disagree, you will still owe the settlement company money due to the time and money you lost, and you may have had late or missing payments. on your credit file accordingly.

What are the differences between debt relief and debt consolidation?

You may be able to work with a debt reduction company to set up a single monthly payment that they will use to make payments to your creditors. It is common for settlement companies to refer to this procedure as “debt consolidation”, but this is misleading.

As a free strategy, you can consolidate your debt by taking out a low-interest loan and paying off high-interest bills with that money, all without third-party intervention. This makes it easier to budget and pay your bills because you only have to worry about one monthly payment. It can also save you money in the long run because you pay less interest.

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