1. High Fees and Interest Rates. Debt consolidation companies often charge high fees for their services. These fees can make it more difficult for borrowers to pay off their debts and may even leave them worse off than they were before they sought help from a debt consolidation company.
2. False Promises. Some debt consolidation companies make false promises about the benefits of their services. They may claim to be able to reduce a borrower’s debt by a significant amount or to negotiate with creditors to lower interest rates. In reality, these promises are often impossible to deliver, and borrowers end up paying more than they would have if they had not used a debt consolidation company.
3. Lack of Transparency. Many debt consolidation companies are not transparent about their fees. They may use confusing language or hide important details in the fine print of their contracts. This lack of transparency can make it difficult for borrowers to understand the true cost of using a debt consolidation company and can lead to unexpected fees and charges.
4. Risk of Further Debt. Debt consolidation companies may encourage borrowers to take on additional debt to pay off their existing debts. This can be a risky strategy that leaves borrowers with even more debt to pay off in the long run. Some debt consolidation companies may even offer loans with high interest rates to borrowers who are already struggling financially, making it even more difficult for them to get out of debt.
5. Damage to Credit Score. Consolidating debt through a debt consolidation company may also negatively impact a borrower’s credit score. The process of consolidating debt often involves closing multiple accounts or purposely defaulting on accounts, which can lower a borrower’s credit utilization rate and credit score.
6. Tax Consequences. When a debt consolidation company settles a debt, the debtor will receive a 1099 for the forgiven portion of the debt. In other words, if a debt consolidation company settles a $10,000 debt for $5,000, then you, the borrower, will receive a 1099 for $5,000. The IRS treats the forgiven debt as income.
In conclusion, while debt consolidation companies may offer legitimate services that can help borrowers manage their debt, but many others put debtors who are struggling financially in an even worse position. Before considering a debt consolidation company, borrowers should do their research, read the fine print, and carefully consider the potential risks and costs of using these services. It’s always best to seek the advice of a trusted financial advisor before making any major financial decisions. Bankruptcy is usually a much better alternative to debt consolidation – it will typically cost far less, have less of an immediate impact on your credit score, and allow for a fresh start to allow your credit to quickly rebuild. In fact, with diligent rebuilding, a person can have a credit score in the mid-700s within 18-24 months of filing bankruptcy. Contact us for a free bankruptcy consultation to discuss what options may work best for you.
