Image via WikipediaDebt-settlement companies promise that you can get out of your debts for pennies on the dollar. Typically, these outfits demand that you stop paying your creditors and instead send the money to them. After a few months, the debt-settlement company promises to open negotiations with your lenders and use the money you've sent to pay them.
The idea is that after a few months of not getting paid, your creditors will agree to a fraction of what they're owed.
Of course, your credit will be trashed at this point, you'll have paid fat fees to the debt-settlement company, and you may be facing lawsuits from your lenders. That's if you're lucky. If you're not, you'll risk all this, and the debt-settlement company will disappear with your money. If you need more details, read "Debt settlement: A costly escape."
Better alternatives include: Debt Reduction Tips.
* Credit counseling. Legitimate credit counselors have debt-management plans that reduce or eliminate the interest rates on your credit card debt.
* Bankruptcy. If you can't pay your debts, you may be better off getting a fresh start through bankruptcy. Your credit rating may recover more quickly, and you'll be able to keep the cash you would have otherwise sent to the debt-settlement company. Consult an experienced bankruptcy attorney who can evaluate your situation and discuss your options.
Debt-consolidation loans from private lenders
A big mistake
If you owe money to lots of creditors, you may be a sucker for pitches from debt consolidators, which promise to combine all your debts into one "affordable" loan.
Unfortunately, though, these loans often come with high interest rates and hidden fees. Instead of helping you pay your debt off faster, a debt-consolidation loan can stretch out your repayment schedule so you actually end up paying more.
Better alternatives include:
* A do-it-yourself plan. If your credit's good, you may be able to negotiate lower interest rates on your debt. (See "Get a better deal . . . with a threat" for techniques.) Then you can tackle your bills one at a time, starting with the highest-rate debt or the credit card that's closest to its limit, while paying the minimums on your other debt. Once this high-priority debt is paid off, make the same-size payment to the next-highest-priority debt. Continue until you're debt-free.
* A debt-consolidation loan from a credit union. Because they're member-owned, credit unions tend to offer more-reasonable interest rates than other lenders.
* Credit counseling. If you can't afford to make the minimum payments on the debt you have, a credit counselor's debt-management plan might be your best option.
* A home-equity loan. Consider this option only if you have plenty of equity in your home, you stop the behavior that got you into debt in the first place and you pay off the loan as quickly as possible. Otherwise, you'll just be draining one of your most important assets, and you'll wind up deeper in debt in short order.
This is my last option. I almost choose not to list it. Only use this if you can and are willing to make life changes in controlling your financial future.
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