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Arm yourself against debt relief scams

[Apr 29, 2011.]


While short term payday loans can be a lifesaver in a true financial emergency, consumers who regularly depend on same day payday loans to pay bills are teetering on the edge of a disaster. Before reaching the point where you cannot pay repay your payday loans, take a hard look at your household income and the bills you must pay. Consumers in financial distress may be tempted to turn to a debt-settlement company, but some of these companies can push into a worse situation.

Debt relief options

1. Debt consolidation for payday loans. If you own a home, you may qualify for a debt consolidation loan to eliminate your credit card debt. Just make sure you can afford the new loan payment.

2. Debt settlement program. A debt settlement program means that a company will negotiate with your creditors to reduce the amount you owe. Be careful. Sometimes these companies will charge high fees that will end up leaving you financially strapped. The forgiven debt may be taxable as income and you could reduce your credit score by participating in such a program.

3. Debt management program. In a debt management program, you will pay one monthly fee to the credit counselor and your debts will be paid by the counseling program. Beware, though, of paying too much in fees, having difficulty making your payment and hurting your credit score by participating in the program.

Debt relief scams

New government rules put in place by the Federal Trade Commission (FTC) in 2010 protect consumers from some debt relief scams, but consumers should also be aware of problems with companies that promise instant debt solutions. According to an article in MarketWatch, consumers often pay fees into an account for several months while the debt relief company negotiates with their creditors. Many companies charge a fee of 15 percent of the total debt over a period of three years or the time it takes to settle all debts. For example, if you have $10,000 in debt, a debt relief company might charge you $1500 in fees. Make sure that the negotiated debt reduction makes up for the fee you are paying.

FTC rules now say:

  1. Companies are no longer allowed to charge a fee before renegotiating, settling, reducing or changing the terms of at least one of your debts.

  2. Companies cannot charge a fee until they have a written contract with the consumer and at least one payment has been made to a creditor.

These rules apply only to for-profit debt relief companies, but non-profit companies are not always legitimate either. Consumers need to understand everything about how the debt relief program works, especially how much they will need to pay and what happens if they cannot make the monthly payments.

A good resource for a legitimate credit counselor is the National Federation of Credit Counselors.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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