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
The negative effect on your credit score is quite
impacting. However, as soon as your debt is paid off and your
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
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
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