As our nation currently struggles under the increasing amount of credit card debt, there has been a massive marketing push from companies offering debt settlement plans.

At first blush this type of plan sounds like the perfect solution: Lower monthly payments, no hassles, and best of all you pay only 50 cents on the dollar…

The problem is that most of the individuals entering into this type of plan don’t fully understand the realities and potential pitfalls with this kind of debt solution (if you could call it a solution).

Many of the companies offering debt settlement programs fail miserably at informing the consumer about these problems and exactly how the service will affect them both short and long term.

Some of the pitfalls you really need to understand before committing to one of these programs are the following:

First, the fees are typically very high. On average you will probably end up paying 15% of the total outstanding debt (so if you are $10,000 in debt it will cost you approximately $1500). Also many companies collect their fees first, before any monies accrue in your settlement account.

Second, all payments to your creditors will stop while you are depositing money into the settlement companies bank accounts. Most consumers don’t fully understand the negative ramifications of this.

Third, your overall debt will most likely increase while waiting for the settlement to take place. As the creditors are not receiving payment you are being charged late fees, and the exorbitant interest rates on the accounts, if this pushes the total debt above the account limit you will also begin accruing over-limit fees.

Fourth, since creditors are not getting paid, their collections efforts usually increase significantly. This means more threatening letters and phone calls. Also, you should be skeptical if a settlement company promises to stop the collections process. This is almost impossible to do when the creditors are not being paid.

Fifth, many creditors will start legal proceedings after extended periods of non-payment. When an account is sent to “legal” the creditor typically seeks a judgment on the account and at that point the judge will authorize the garnishment of your wages to pay the account.

Sixth, your credit report will be in shambles while waiting to settle the accounts since the creditors are not being paid and will report such. Also, if the account is settled, that settlement indication will show up on the account for up to 7 years from the date of the settlement.

Seventh, if an account is actually settled, the creditor will then send you a 1099 (tax form). You will then owe the IRS the taxes on the amount between what was owed and what was settled. For instance if you owed $10k and the account was settled for $5k, you would owe taxes on $5k.

So as the adage goes: “if it sounds too good to be true…” When it comes to debt settlement there are really too many negatives to make it a viable program.

If you have large amounts of credit card debt, look into a credit counseling organization that can truly help you. Credit counseling can reduce payments and interest, stop nuisance fees, as well as collections proceedings and get you out of debt without all of the negative effects and frustration associated with debt settlement programs. Fill out the form above for your free no obligation financial consultation with a certified credit counselor today.

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