3 unexpected downsides of debt relief to know before enrolling
Debt relief programs, while appealing for those struggling with high debt, can have significant downsides including damage to credit scores, potential tax liabilities on forgiven amounts, and longer-than-expected timelines. Stopping payments to pursue settlement often leads to delinquencies that hurt credit, and forgiven debt may be treated as taxable income by the IRS. The process can take months or years with no guarantees, and borrowers may still face collections or lawsuits. Understanding these risks is crucial before enrolling in a debt relief program.
- ▪Stopping payments as part of debt settlement can severely lower your credit score and result in long-lasting negative marks on your credit report.
- ▪Forgiven debt may be considered taxable income by the IRS, potentially leading to an unexpected tax bill unless you qualify for an exception like insolvency.
- ▪Debt settlement timelines are often longer and less predictable than advertised, with no guarantee of success or protection from creditor actions during the process.
- ▪Some debt relief strategies may leave you vulnerable to collection calls, late fees, or legal action even while saving for settlement offers.
- ▪Alternative options like credit counseling, debt management plans, or consolidation loans may be more suitable depending on individual financial circumstances.
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MoneyWatch: Managing Your Money 3 unexpected downsides of debt relief to know before enrolling We may receive commissions from some links to products on this page. Promotions are subject to availability and retailer terms. .chip { background-image: url('/fly/bundles/cbsnewscore/images/chip-bgd/chip-bgd-moneywatch.jpg'); } By Angelica Leicht Angelica Leicht Senior Editor, Managing Your Money Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.
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