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Debt negotiation programs have pitfalls
Debt negotiation can promise a lot, but delivers little
There are many firms that advertise that they can get you out of debt through their debt negotiation program. Be careful, these plans can often cause more harm than good.
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Debt negotiation programs often promise more than they can deliver
With Americans deeper in debt than ever, Congress recently passed the Bankruptcy Abuse and Consumer Protection Act, a law designed to make it harder for consumers with problem debt to have those debts wiped out through bankruptcy. When that law takes place in October 2005, thousands of Americans with problem debt will need to find other solutions for eliminating their debt burden. The best solution is the oldest one; pay the bills, no matter how long it takes or how painful it can be. But many people are on the lookout for a quick and easy solution, and one that often comes up in conversation is the debt negotiation program.
Heavily advertised on late night television, the debt negotiation program is promoted by companies that promise the moon and the stars. They can lower your interest rates. Even better, they can lower the actual amount you owe! They’ll tell you that if you owe $20,000, that they can reduce that to $8000 or less. These companies often promote themselves as “nonprofit” and they’ll tell you that their programs are a safe alternative to filing for bankruptcy. All you have to do is sign up for their plan, pay their upfront fees, and start sending money to them instead of your creditors each month. What can go wrong?
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Plenty can go wrong. Here’s a short list:
- While many nonprofit debt counseling firms are legitimate, most of these “nonprofit” debt firms aren’t really nonprofit. They want fees, and they want them upfront and every month. They’ll want the fees even if they can’t reduce your debt.
- Some agencies will use the first month’s payment to pay themselves, meaning that your creditors won’t get any money. Your creditors still want payments every month, and if they don’t get them, they’ll put it on your credit report as a negative entry. And if they’re not getting the payments, they’ll add interest and penalties, which makes your situation worse.
- There’s no guarantee that your creditors will even accept partial payment. One way to find out is to call them and ask them yourself. For that matter, you can negotiate with your creditors yourself and save the money you’d pay the agency.
- The Internal Revenue Service will count forgiven debt as taxable income. Even if an agency can negotiate your debt from $20,000 down to $10,000, you’ll have to pay tax on the $10,000 that you didn’t pay. That can amount to several thousand dollars.
These “programs” are often expensive and don’t help much. A better solution would be to obtain some legitimate credit counseling. Many credit counseling agencies can enroll you in a debt management plan, which can genuinely help you pay off your debts in a reasonable amount of time with the full cooperation of your creditors. Talk to a counseling agency and stay away from the late night TV advertisers.
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