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Don't Get Slapped with the Hidden Burdens of Debt Relief
By Siddarth Nagaraj on September 23, 2011

292246_5528-(1).jpgAcross the country, millions of Americans struggle to resolve personal troubles related to chronic debt. Subsequently, an entire industry of scams and self-proclaimed solutions to financial problems has emerged, all grouping themselves under the general label of “debt relief.” Preying upon vulnerable people looking for a way to reduce financial pressure, many agencies offering forms of debt relief such as consolidation and debt settlement try to trick the public into thinking it is possible to escape accountability to one’s creditors. While debt relief can be both useful and possibly necessary under certain circumstances, know first what means of debt resolution are available to you and whether it is the optimal choice for your situation.
Widely promoted as a smart, easy means of simplifying your financial affairs so that they are easier, debt consolidation is in fact a risky venture. Consolidation agencies portray themselves as providing relief through the collective organization of all your debts into one large payment. This step, so the argument goes, will make it easier to manage your finances, especially if you are in deep debt to a wide number of creditors. However, the introduction of a third party (the consolidation agency) pulls you into further debt as you now owe the consolidators as part of their fee for their involvement in your affairs. What is more, although letting another organization group your debts together for you may seem convenient and appealing, allowing someone else to handle your finances can make you less aware of the details of your financial situation, leading to detachment and weakening your ability to become independent again.

Another form of debt relief that can seem an attractive option is debt settlement. Individuals who engage in debt settlement negotiate an agreement with their creditors in which they pay a percentage of their total debt and the rest is forgiven. However, the use of debt settlement is noted in one’s credit report, which will cause a major credit score downgrade (up to 130 points), severely impairing access to future credit. Furthermore, credit card companies are naturally extremely reluctant to engage in debt settlement and are usually only willing to discuss it with clients who are barely solvent. The percentage of forgiven debt will very likely be less than 50% and must be reported to the IRS as income unless you have declared bankruptcy or your liabilities outweigh your assets.

Neither debt settlement agencies nor debt consolidators will help you if you encounter trouble with parties such debt collectors who are hired by your creditors to extract payment from you and often do not refrain from engaging in harassment. Both charge tremendous fees for their services, which are focused upon one area of debt management. A more advisable option would be to seek the help of an honest credit counseling service. The National Foundation of Credit Counseling maintains a nationwide database of certified credit counselors on their website. Working with a good counselor can help you identify debt relief strategies that may work well in your case.

As much as we would like to do so, it is not possible to escape our creditors. There are ways of resolving issues related to bad debt, whether through compromise or restructuring one’s finances with the aid of certified counselors. No matter what, it is crucial to remember that debt relief does not remove the burden of financial responsibility.
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