One of the toughest things to do in life is to get out of debt. It requires serious debt management measures in order to do so. And to be successful at it, and to keep as much as possible, you need to engage in aggressive debt reduction. But, on your quest for workable debt management, be wary of debt negotiation companies. While it is possible to negotiate with creditors, some companies do very little good and can inflict damage on your credit score.
How debt negotiation works
Here’s debt negotiation usually works with “nonprofit” debt management programs. First, you agree to pay a certain amount of money each to the company each month. This money goes into an account (minus service and administrative fees, of course), which builds up. Meanwhile, you stop paying your creditors. This is where your credit score starts to take a hit. The company negotiates payment with your creditors, seeking to reach an agreement. Sometimes this results in reductions to your balance (after all, if you have high interest rates, the company probably has received all of its money back, and then some). Other times, it just means an interest rate reduction. Either way, the debt negotiation company uses the money you have been paying in to make payments on what is owed.
Drawbacks to debt negotiation
Many debt negotiation companies insist that this is a good alternative to bankruptcy. And it could be. After all, bankruptcy stays on your credit report for 7-11 years, affecting your credit score. Not paying your bills usually drops off after 3-5 years (sometimes longer, though). Back before 2005’s new bankruptcy law was passed, the threat of bankruptcy was often a motivator to creditors to be a little more flexible. However, the new laws favor creditors, and so threatening bankruptcy is no real threat to creditors. This means that creditors may be less likely to do business. Additionally, the effects of debt negotiation on your credit score are hard to predict. It could ruin your credit for years to come, affecting home and car loans, as well as whether or not you get a job.