Settling Unsecured Personal Loan Woes with Debt Agencies
At times it can feel as though for every useful product that appears for consumers, two scams weasel their way into the market.
And according to a new report by the National Association of Consumer Bankruptcy Attorneys (NACBA), that product is hardly a product at all. It’s a service – one that is supposed to alleviate cash-strapped consumers.
As NACBA states, few as one in every ten consumers who enlist the help of “debt settlement” agencies actually end up clearing their negative slate.
“Already struggling with home foreclosures, harsh bank and credit card fees and other major financial challenges, America’s most deeply indebted consumers are now falling victim to a new threat,” the research paper explained. “So-called ‘debt-settlement’ schemes that promise to make clients ‘debt free’ in a relatively short period of time.”
According to an article by Smart Money, debt settlement agencies will typically offer an indebted consumer a one-time payment – typically 40 to 60 percent of their current debt – to be paid to the creditor. The debt will then be forgiven, but the consumer can end up digging themselves into an even deeper pit if they’re not prepared to fork over the cash on the spot.
There’s a business brewing with unscrupulous debt settlement agencies. Where there’s a market for something, even if its downtrodden consumers faced with serious debt loads, there’s a dollar to be made. And when it comes to consumers that have bit off more than they can chew with their unsecured personal loans, that settlement trap could be costly.
Hardly Advantageous
On average, debt agencies will typically offer two kinds of services. The first is a settlement, which would clear the consumer of all debt so long as they pay about half of the standing balance. However, there are a few byproducts that can come from a partially settled debt load.
Herein lies the first issue with the settlement: tax liability.
For the tenth of consumers who actually benefit from the settlement program, the amount of savings is typically considered to be taxable income, as lenders and credit card companies have the ability to report a debt reduction to the IRS.
“Typically, customers are told to stop paying their bills and instead send money to the debt-relief firm, which holds on to the money with the intention of offering creditors a lump-sum offer for less than what’s owed,” explained Michelle Singletary of The Washington Post.
And for those nine-tenths that fail to overcome the settlement hurdle, their failure to pay is even more costly. Borrowers are essentially accruing yet another kind of debt on top of their previous credit. And the agencies are particularly tactful with their sugarcoating, with most promising painless and quick roads to alleviating debt loads.
As for the agency’s second service of debt counseling, even that advice can go astray.
As the NACBA report found, a great deal of agencies urged borrowers to default on their loans if they were unable to scrape up the change for nearly half of the current outstanding debt.
Defaulting with an unsecured personal loan can lead to fines, penalties and hiked interest fees right off the bat. Not to mention, the lender has the right to report a default to credit agencies, resulting in a plummeting score if the loan is sizable enough.
And, as the report went on to state, some lenders can even find ways to ensure Uncle Sam is on their side, with many defaults resulting in wage garnishments.
Treading Murky Waters with Debt Problems
It’s no secret why debt settlement agencies have produced such a booming business. Many consumers have struggled to maintain an acceptable standard of living in the recession, and taking on larger amounts of credit through cards and personal loans, has been increasingly common.
Given this, even the slightest promise of debt alleviation can be tremendously tempting for indebted individuals.
However, borrowers should continue to beware of agencies offering “quick fixes” for substantial debt issues. Accruing considerable debt didn’t happen overnight, so consumers should take that same mentality and apply it to their eventual escape.
Never default on a loan.
As tempting as it may be to throw up a white flag of defeat with an unsecured personal loan, borrowers should always be wary of defaulting. Although it’s seen as an exclamation of defeat – similar to bankruptcy – the problems will only continue to escalate for the indebted.
And as for access to feasible interest rates for any kind of credit in the future, consumers can completely forget it if they decide to default.
“Self-help” whenever possible.
As troublesome as it may sound, consumers will benefit from a financial standpoint if they make an effort to individually alleviate themselves from debt.
The Federal Trade Commission recently offered a list of tips for indebted consumers looking to help themselves surface from financial problems. The first and foremost advice was to outline a budget, and separate all expenses as either “fixed” or “variable”. According to the FTC, those “variable” expenses should be trimmed as much as possible.
But beyond this, the FTC also strongly suggests that borrowers contact their creditors at the first sign of financial stress. Consumers should explain them why it’s difficult for you to keep payments, and request some kind of modified plan if at all possible.
Seek non-profit debt agencies.
Non-profit debt organizations, especially those tied to the government, will offer the best kinds of rates for consumer help. And more often than not, these kinds of services are free to the public.
Escaping the thralls of debt is no easy task. While it’s tempting to seek the quickest, easiest and most simple solutions, borrowers must also consider the sheer weight that a debt load holds. While being debt-free is certainly an attainable goal, it will come with some considerable work on the part of the consumer.
However, unscrupulous settlement agencies should be avoided at all costs.
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