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Debt services typically charge a percentage of a customer’s debt or a monthly program fee. And not all companies are transparent about these costs — or about drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a company:
Debt consolidation sometimes refers to a wide scope of products and services, from low-interest personal loans to help negotiations with your creditors. Some of the solutions you might find with one of these providers include:
In most cases, financial services that negotiate with your creditors are legit. But you should avoid signing up with a company that doesn’t meet federal requirements or doesn’t provide much information on its website.
Paying down your debt should have a positive effect on your credit in the long run. But the immediate effects vary. A debt consolidation loan can have a positive impact on your credit right away, since you’ll be able to pay down your debt faster. But if you miss a payment, it will hurt your credit.
Credit counseling and financial service companies will have little to no impact on your credit score — but settling your accounts can. If your company tells you to stop paying your creditors, you may face a lower credit score, more collection calls and a lawsuit once your debt is sold to collections.
If a lawsuit is successful, a debt collection agency may be able to garnish your wages for the amount owed, which could throw a wrench in the debt relief process. Carefully consider the potential downsides to a financial service company before signing up for a program.
Consider the following factors when comparing financial services companies:
While hiring a company to negotiate your debt can be helpful for a lot of people, know what you’ll have to pay before you get started.
There is a tax loophole, however: You might be exempt if your tax liabilities are greater than your assets at the time of the settlement. Talk with a tax specialist before enrolling in a settlement program to learn how this exemption might affect you.
Many companies that negotiate with creditors for a fee are legitimate. But there are scams out there. It should set off alarm bells if you a see a company committing any of these offenses:
It also pays to be aware of your state laws. Ensure that any company or attorney you’re working with holds the appropriate licenses and follows state regulations.
The most recent government crackdown has focused on companies that claim to settle student loan accounts — one reason why most legit financial service companies won’t touch student loans.
Watch out for any offers that try to get you to sign up for a new program fast, customer service reps that ask for your login information and anyone who claims to be a representative from the Department of Education. And check out our guide to avoiding student loan debt scams for more tips on what to look out for.
You may be able to handle your debt on your own with determination and a manageable budget.
If you’ve decided on settlement, consider these top debt relief companies when you’re ready to get started.
Answers to commonly asked questions about debt relief.
No, there are no federal or private grants to help individuals pay down debt. And the federal government doesn’t directly offer financial services.
But you’ll find government-approved credit counseling agencies. Avoid working with any companies advertising a “new” government debt relief program — it’s a common scam tactic designed to steal your money.
Yes. You can work with the IRS to come up with a payment plan, reduce the amount of debt you owe or even pause collections on your debt. This service is done directly through the IRS, rather than an outside company.
Alternatively, you can take out a personal loan to pay off your tax debt if you just need to break it up into more manageable installments.
It depends on the program, but some require you to cancel your credit cards. In some cases, if you stop making payments, your credit card companies may also cancel your cards.
You might be able to apply for additional cards after you’ve settled your accounts, but you won’t be able to use your old ones. Look into secured credit cards designed to help you rebuild your credit score.
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