Risks of Debt Negotiation Companies

Whether debt negotiation companies are worth using depends on the amount of risk you’re willing to take. Debt negotiation companies are not credit counselors.  In fact, creditors such as credit card companies don’t have to agree to negotiate with these companies at all. Although there are good debt negotiation companies, there are plenty of debt negotiation scammers. Thus, Debt negotiation companies can have long term negative impact on your credit report, according to the U.S. Federal Trade Commission (FTC).

Risk: Debt Negotiation Companies Make False Claims

Generally, debt negotiation companies may tell you that they can wipe out up to 50 percent of the debt such as credit card bills you owe. In other words, if you have $20,000 in debt, debt negotiation companies can promise that you may only have to pay $8,000 to $10,000 of that debt. However, creditors don’t have to agree or accept less money. However, if creditors do agree, the cancelled portion of debt is still your responsibility. The Internal Revenue Service (IRS) considers the amount that you don’t pay as income. Thus, you’ll be responsible for paying taxes.   

Risk: Creditors Can Sue You

Debt negotiation companies often tell their clients to pay them a certain amount of money a month because they will use the money to pay off creditors each month. However, what they may not tell you is that you’re taking a risk by allowing them to pay your bills. Some companies wait to pay off the debt in a lump sum—or not at all. This means that creditors can still sue you if you work with debt negotiation companies.

Seek Legal Help

Before you decide that debt negotiation companies are right for you, talk to a lawyer. A lawyer can help you find the right debt negotiation company or explain other debt management options such as bankruptcy.