Debt consolidation is a popular way to repay debt by combining multiple debts into a single loan. However, it’s not a quick fix, and it’s important to evaluate your financial situation before proceeding.
Other Debt Relief Options
- Fees: There may be upfront fees, such as an origination fee for processing the loan, or balance transfer fees for credit cards.
- Credit score: If you have a lower credit score, you might not qualify for a favorable offer, or you might receive a higher interest rate.
- Monthly payments: Consolidating debt can sometimes increase your monthly payment, especially if you were previously paying only the minimum due on your credit cards.
- Repayment period: The repayment period for a debt consolidation loan can be long, sometimes up to seven years or more.
- Credit damage: If you miss payments, your credit could suffer.
- Temptation to spend more: If you consolidate your credit card debt into another loan, you might be tempted to run up those balances again once the cards are paid off.
- Loss of benefits: You might lose certain borrower benefits.
Debt Settlement
- Debt Settlement Fees. Many debt settlement providers charge high fees, sometimes $500 to $3,000 or more. …
- Debt Settlement Impact on Credit Score. …
- Holding Funds. …
- Debt Settlement Tax Implications. …
- Creditors Could Refuse to Negotiate Your Debt. …
- You May End Up with More Debt Than You Started.
Debt settlement can have several negative effects, including:
- Credit score: Settling a debt for less than the full amount is usually reported to credit bureaus as “settled” or “paid for less than the full balance”. This can lower your credit score, making it harder to get new credit in the future. The notation can stay on your credit report for up to seven years.
- Tax implications: The forgiven debt may be considered taxable income by the IRS. You can be issued a “Form 1099-C” for cancelled debt, which can be considered taxable income to you in the your forgiven, which you might be added to your taxable income for the tax year the debt is forgiven. Consult your tax professional for potential tax implications in your particular situation.
- Fees: Debt settlement companies often charge fees, which can be high, sometimes $500-$3,000, or more. Sometimes, the settlement company requires that their fees be paid in full before they send your first dollar to your creditors.
- Late fees and interest: Even if the original owed amount is reduced, the amount you owe may increase because of late fees or penalties or interest.
- Account closure: The creditor may require you to close the account, which will result in losing access to that credit line.
- Creditors may not negotiate: Creditors are not legally required to settle for less than you owe.
- More debt: You may end up with more debt than you started.
Debt settlement is sometimes mistakenly referred to as “debt relief”. It occurs when you and a creditor agree to settle debt for less than what you owe.
How does debt settlement work?
Debt settlement is the process by which your debts are settled for less than you owe. Though you can settle debts yourself, many borrowers hire a for-profit debt settlement company.
Here’s how it works:
A debt settlement company will ask you to stop making payments on your debts and instead funnel that money into an escrow account, which is a separate account set up by the settlement company. As your debts become increasingly delinquent, the settlement company will approach your creditor with an offer, using the money in the escrow account. Ideally, the creditor accepts the offer, with the thinking that some money is better than none. Then, your debt is cleared for the lesser amount.
Debt settlement isn’t free. Debt settlement companies may charge a fee of 15% to 25% of the amount you owe for each successful settlement. For example, if you owe $10,000 and the debt settlement company charges a fee of 25%, you’ll pay a $2,500 fee (in addition to the settled amount).
Risks of debt settlement:
Though debt settlement may sound promising, settling your debts can take two to four years, and there are serious consequences to falling that far behind on payments. You could also face pressure tactics from collectors. If you’re getting calls, the creditor also has the option of filing a civil lawsuit against you. As interest and fees from your creditors pile up, you’re reducing any potential savings that debt settlement promises.
There’s also no guarantee a company can settle your debt. Some of your creditors won’t accept a debt settlement offer or work with debt settlement companies. Any debts you successfully settle may further hurt your credit score, since settled accounts stay on your credit report for up to seven years.
REVERSE MORTGAGES
Before getting a reverse mortgage, it’s important to discuss your financial goals with a financial advisor.
A reverse mortgage can have several drawbacks, including:
- High costs: Reverse mortgages have high upfront and recurring costs, including mortgage insurance premiums, closing costs, loan origination fees, interest, and monthly servicing fees. Interest is compounded, so you pay interest on the interest.
- Debt accumulation: The debt from a reverse mortgage can grow to equal the value of your home, leaving little for your heirs. If you can’t repay the loan when you die, your heirs may not inherit the home.
- Eligibility: A reverse mortgage can affect your eligibility for certain government benefits.
- Foreclosure: Lenders can foreclose on your property if you don’t keep it in good repair, pay your real estate taxes and homeowners’ insurance, or meet other obligations.
- Liquid assets: A reverse mortgage can increase your liquid assets, which could reduce your eligibility for Medicaid benefits.