What Debt Consolidation Companies Won’t Tell You

Those suffering from the negative effects of high debt loads often turn to debt consolidation companies for help. For years such companies have promised consumers a painless way to not only pay off mounting debts, but also to help get their financial lives back on track. Though these programs do work, there are often several aspects of debt consolidation programs which may be downplayed or undisclosed by enrollment counselors. Here we will take a look at three things your debt consolidation company may not tell you.

It will affect your credit

For those who have moderate to high credit scores, doing a debt consolidation may affect your credit. This is because one of the key negotiating tactics used by the companies is to withhold all payments from the creditor until the creditor agrees to settle. This withholding of payment means that usually you will be reported to the credit bureaus as late for several months, to several years, before the debt is finally settled. For those with negative credit profiles the process may not further damage your credit, as there is only so far down a credit score can go. But, for those with good credit, going late on the debts and being sent to collections may have a devastating effect on your credit.

You may owe taxes on the money you save

After settling your debt with a creditor, they have the option to report that savings to the IRS. Depending on whether or not a creditor reports your savings to the IRS, you may be required to pay taxes on the difference between the settlement amount and the original balance of the loan. For example, if you originally owed $10,000 on a credit card and settled that debt for just $4,000, this would represent a savings of $6,000. If your creditor reports the savings to the IRS, you may be responsible for paying taxes on the $6,000 you saved. Depending on your tax situation the IRS may view the savings as income.

You may get sued

Though creditors have their own internal criteria which they use to determine whether or not to take a borrower to court, it is not unheard of for creditors to sue the their borrowers, even when the borrowers have entrusted debt consolidation companies to repay their debts. This is not to say that debt consolidation customers will necessarily face court action, but any company selling the service should make the risks clear to its potential customers, and also advise them of the company’s policies and procedures for handling such situations.

Debt consolidation can be a good option for the right kind of customer. Those who have fallen behind on their debts or have multiple accounts in collections are the ideal debt consolidation clients. However, those who are simply looking to lower their monthly debt payments, but are generally able to meet their monthly minimums, should think twice before enrolling.

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