For the average person, it can be a little hard to understand how debt relief companies work. Especially due to the fact that there are so many different types of debt relief firms out there. So what are the different types, and how do they function?
What is a Debt Relief Company?
Debt relief companies are a type of for-profit business designed to help consumers work their way out of debt. They’ll often have different strategies for doing so that are dependent on both the type and amount of debt you have. Generally, they’ll work with you to figure out which strategy fits your situation best. So what are some of the different strategies these companies offer, and how can they help you towards a debt-free future?
For those with high-interest debt like credit card debt or payday loans, debt consolidation is a type of service that may work for you. Debt consolidation companies work by offering to pay off your debt and give you a more favorable interest rate. This leads to a mutually beneficial arrangement in which the customer pays a lower interest rate, and therefore a lower amount over the lifetime of the loan, and the company gets a steady return on their investment in your financial health. While debt consolidation isn’t right for all types of loans, for those with a lot of credit card debt, it may be the best option. It can also help prevent your credit card company from winning a judgment against you, as bank accounts are susceptible to wage garnishment if they win in court.
Debt settlement is another type of service offered by debt relief firms. This is generally reserved for those with low-interest loans that they have difficulty paying. The process begins with a debt holder contacting a debt settlement company, and the settlement company will then take a look at the financial information they provide and assess whether a settlement is a good fit for them. If it is, then you’ll be instructed to forego paying those debts, and instead, the money you would have otherwise paid on the debt will go into a special account. As this account grows over time, your debt settlement agents will work to negotiate a deal with the company that owns your debt. By using the account as leverage, it’s possible to end up paying a discounted rate on the debt you owed.
For those with unsecured debt, like credit cards, in small amounts, debt management might be the best option for you. Debt management can be a bit more involved than other forms of debt relief and can help get you back on your feet by providing the financial knowledge to better manage your debts. A credit counselor can also assist you in dealing with your creditors and scheduling out a repayment plan that works for you. They’ll also be able to help you build a budget and improve your overall ability to build your credit score back up.
Are There Any Drawbacks to Using a Debt Relief Company?
One of the major drawbacks to using a debt relief company is the potential for a hit to your credit score. Although if you’re already considering utilizing a debt relief company, you’ve likely already begun missing payments or falling behind on your bills. So using the services of a debt relief company might be the best option to begin building back towards financial stability. Another potential drawback to being on the lookout for is the fact that the IRS considers settled debt to be income. That means that the portion of the debt you end up not having to pay becomes taxable income, and can be added to your tax bill at the end of the year. And after learning how debt relief companies work, it’s up to you to figure out if the benefits are worth it.