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Why you should avoid working with debt settlement companies

If you have been struggling with debts, you may have noticed ads from debt settlement companies that promise to bring an end to your financial problems. These ads promise to settle your debt for pennies on the dollar. As a result of these promises, you may be tempted to give the companies a try, instead of considering bankruptcy, for example. However, in reality, the adage that says if it is too good to be true, it probably is comes into play here. According to the Federal Trade Commission, debt settlement companies have an abysmally low success rate-about 10 percent. The reason for this is the unethical way that many of these companies operate.

High rates, low rewards

Debt settlement companies are like any other for profit business-their purpose is to make money. As a result, these companies charge fees for their services. Unfortunately, the fees are often very high-15 percent of the debt owed (or more) is not unheard of. Sadly, these fees are payable regardless of whether or not the company is successful in settling your debt.

In most cases, the companies are not successful, primarily due to questionable advice and tactics. Most settlement companies will advise you to stop paying your bills as it negotiates with your creditors. The hope here is to use nonpayment as leverage to get your creditors to agree to accept less than the full amount of your debt as payment in full. However, this tactic almost surely backfires, as you will be hit with interest and late fees as soon as you stop paying your bills, causing your balance to grow precipitously. Additionally, your nonpayment may persuade your creditors to adopt more aggressive collection tactics, such as garnishment or collection lawsuits, putting you in a direr situation.

More often than not, once you have paid your fees, the settlement company does little or nothing on your behalf to reduce your debt. As far as they are concerned, successful settlement of your debts is of no matter to them once they have received a check for their fees. Unfortunately, even if the company manages to succeed in reducing your debt, you will be liable for taxes on the difference between what you owed and what it was settled for, as this is considered income under the tax code.

Get help if you are experiencing problems

If you have bills that you have little hope of repaying, it is time to get professional legal help. An experienced bankruptcy attorney can review your situation, outline all feasible solutions and recommend the best course of action for someone in your situation to take. Unlike debt settlement companies, your attorney is on your side and, once hired, is bound to help you find a solution that keeps your best interests at heart.

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