DOWNSIDE OF DEBT CONSOLIDATION

Debt consolidation will help you get rid of your debt and teach you how to manage your finances. However, there are some negative consequences associated with debt consolidation. But, if you are not able to make the payments for your debts, and your account has become delinquent as a result and you are now being endlessly harassed by collection agencies, enrolling in a debt consolidation program is still smarter route to take than filing for bankruptcy.

Your credit score is going to be impacted. 
The negative effect on your credit score is quite impacting. However, as soon as your debt is paid off and your start rebuilding your credit, your score will begin to improve. When working with any debt consolidation company, you should communicate your concern about the consequence on your credit. They should be able to work a plan with you that will minimize the negative credit results. Specifically, they will develop a reduced payment plan to terminate any further damage from incurring as a result of delinquent payments. In addition, once your debts are paid off, make sure the debt consolidation company sends a PIF letter (paid in full) to your creditors. As opposed to 'debt settlement' a PIF letter is better for your credit when looking to get credit with creditors in the future.

You could get sued.
As soon as you file bankruptcy, by law creditors must stop their attempts at collection. However, even when you are enrolled in a debt consolidation program, your creditors can still progress with their attempts to collect unpaid balances. And it is very possible that some creditors may select to sue you for the total balance. It is important to note though that creditors will likely not sue if they feel that you may be heading towards filing for bankruptcy. They would prefer to get some of their money instead of none of it. But, if you are not qualified for bankruptcy, your creditors may come after you fill force.

Significant tax consequences.
If your reduced balance is greater than $600 your debt is taxable. For example, if your tax rate is 15%, $7,000 of reduced debt will bear a $1050 tax liability which will be owed to the IRS. You can petition the IRS to relinquish that tax liability in the event that your assets are worth less than your total liabilities.

Debt consolidation services are illegal in certain states.
The laws that regular debt consolidation differ significantly from state-to-state. There are twelve states that clearly forbid for-profit debt consolidation companies from conducting any sort of business with people living in the following states: Georgia, Arizona, Hawaii, Maine, Louisiana, Mississippi, New Jersey, New York, New Mexico, Wyoming, North Dakota, and West Virginia. Find out what the debt consolidation laws are in your state by clicking here.

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