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Bad Debt Relief: Possibilities and Pitfalls
By Siddarth Nagaraj on January 12, 2011

umbrella-(1).jpgBad debt is an all-too common phenomenon. While it can be accumulated it many ways, it triggers a series of consequences that can badly damage your financial state. What’s more, there are plenty of false “solutions” that promise ways to “fix” your debt. In order to avoid these traps, you should be aware of what bad debt relief options are valid and which ones shouldn’t be trusted.
Unfortunately, the large number of people beset by personal issues linked to bad debt has spawned a market that preys upon a vulnerable public seeking a way to find relief. One of the most common types of scams linked to the debt relief is so-called “debt elimination”, which assures you that you can avoid fully paying some or all of your creditors, including the federal government. There are ways to negotiate with the IRS, but those involve authorized payment plans and it is not a good idea to employ the services of those who claim they can remove your liability for all your debt. Don’t listen to their advice either.

Payday Loans are another popular supposed “quick fix” solution for bad debt relief. These are regularly advertised as a simple, no-frills means of accessing money immediately that requires only a blank check, a driver’s license, and a recent pay stub. Yet the use of payday loans has many negative consequences. Firstly, reliance on the loans increases further dependence on an external source of money and prevents you from moving closer to financial independence even as you struggle to resolve debt problems. Secondly, payday loans often charge highly exorbitant interest rates that will only incur further costs amidst all your other troubles.

One of the most widely advertised debt relief options is debt settlement, which can have mixed implications for your financial future. In exchange for a lower monthly payment, debt settlement companies provide an estimate for reducing your debt. The first few payments make up the company’s fee, while the rest goes into an account. Although the company will negotiate a settlement with your creditors, there will still be severe consequences for your finances. Having chosen to settle your debt will negatively affect your credit score, leaving records of late payments on your credit report for seven years. This in turn could damage your prospects for future employment and insurance. It will also limit your financial resources even further as creditors will be unwilling to give you loans.

Consumer credit counseling is another alternative that may be worth considering. Your credit counselor will work with you to produce a Debt Management Plan (DMP) which must be approved by all your creditors to proceed. Your payments will then go to the credit counseling agency, which follows the DMP guidelines by transferring the payments to your creditors. It should be noted that although many credit counseling agencies claim to be “non-profit”, they charge fees for their services. This is accounted for in different ways depending on the agency, so it is important to be aware of the fee’s amount and where it will be charged. Some agencies will also demand a fee in exchange for basic information about their services. Whenever possible, avoid these companies. Credit counseling is most useful if you doubt your own financial discipline in dealing with your creditors or if you think you need professional help in negotiating a payment plan. Apart from that, many of their responsibilities are tasks which are useful to know how to do and are important in a financial education.

Most of all, you should always be cautious when seeking a bad debt relief service, regardless of what choice you make. Avoid selecting a service based upon seeing an advertisement on television and the Internet. The National Foundation of Credit Counseling keeps a record of trusted agents and resources provided by the Better Business Bureau can help you identify and assess groups that can help you.
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