Understanding the Consequences of Debt Relief Programs

No one wants to deal with debt relief. But this is just the reality for many people. If you’re in this boat, it’s time to gather as much information as possible about the process. These are some things to help in understanding the consequences of debt relief programs.

Damage to Your Credit Score

Your credit score is important. Although it’s something that sort of lives in the periphery most of the time, your credit score is how lenders determine whether you’re worthy of a loan. Beyond that, your credit score is instrumental in deciding the terms of your loan if you qualify for one.

Due to these factors, it should go without saying that your credit score is important. This single number can make a massive difference to your financial wellbeing. So how does this relate to debt relief programs? Well, depending on the route you take, your credit could take a serious hit.

Let’s first look at debt management plans. Here, you work with a credit counseling service or debt relief agency, which works with your lenders and then offers you a new, single loan or payment with a lower interest rate. Taking this route is generally not going to have a big negative impact on your credit, and can even help it over time as long as you make consistent payments. You might have to deal with a temporary hit to your credit when you close your old accounts. But this should be more than made up in time.

Debt settlement and bankruptcy, on the other hand, can have significant implications for your credit score. With debt settlement, you send money to a debt relief agency to keep in a separate account while simultaneously ceasing to pay your bills. This creates a situation where your lenders might settle for less than the original amount. In doing this, however, you’re negating one of the most important parts of your credit score: making on-time payments.

Bankruptcy is like a credit wrecking ball. Not only does it annihilate your credit score, filing for bankruptcy protection stays on your credit report for seven to 10 years. This will make your financial life a nightmare for a long time.

Look Out for Hidden Costs and Fees

When it comes to your finances, you should always expect someone is going to try to take advantage of you. While this might be a cynical point of view, it’s an unfortunate reality that some people or organizations operate with shaky ethical standards. This is something worth looking out for when choosing debt relief programs.

Some debt relief agencies will be very sneaky with their cost and fee structures. This can make it difficult for consumers to fully understand what they’re signing up for when agreeing to a debt relief program. Be sure to do some independent research and read online reviews about a debt relief company before making any decisions. Getting nailed with hidden fees can totally derail your chances of successful debt relief.

Debt Relief Can Affect Your Taxes

When you have a debt settled to a lower amount, that is then considered as taxable income. And what do you have to do with taxable income? You have to pay taxes on it. This can come as a surprise to people who assume debt relief won’t affect their taxes. It’s important to note, however, you might be on the hook for paying taxes on your settlements.

There’s No Guarantee It Will Work

Like with all things in life, there’s no guarantee things will work when it comes to debt relief. It should set off alarms in your head if any organization tells you they can guarantee results for you. This is absolutely false. It’s necessary to understand this going into the debt relief process, as many people are under the false premise that debt relief programs are foolproof.

There’s a lot of information to gather and absorb when it comes to debt relief programs. Try not to get overwhelmed when working through the process. Talking to a credit counseling service is a great place to start, as they can give you free advice and some educational materials.