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Seeking quick debt relief may be a big mistake

The economic downturn of the last decade left many Wisconsin residents in immense debt. Even though the economy is recovering, a significant number of people in Wisconsin, as well as elsewhere, are still struggling with unsecured debts, such as credit card balances or uncovered medical bills.

Often desperate to find quick and easy debt relief options, many end up making wrong decisions and choosing wrong options. The most common tactic seems to be working with a debt settlement company, which often promises a quick recovery. Usually, the process involves a debtor making payments to a debt relief company, instead of creditors. The debt relief company offers the original creditor a reduced one-time payment to release the client's debts.

This strategy seems plausible because many creditors are happy to recover whatever amount they can from a debtor otherwise unlikely to negotiate or settle a debt. However, according to the Center for Responsible Lending, settling debt through a debt relief company may increase outstanding balances by an average of 20 percent due to interest, late fees and other ancillary charges.

It is illegal for a debt relief company to charge fees until they successfully erase or reduce a consumer's unsecured debt and it's not permitted to redo the percentage of debt as well. The Federal Trade Commission considers the violation of these rules a major offense and recently brought charges against a company which promised clients debt relief in 18 months and a 30-percent reduction in debt level.

A Wisconsin resident should know that many creditors refuse to deal with debt relief companies and may even pursue legal action against a debtor for not making timely repayments. Moreover, fees that a debtor pays and growing interest charges may have significant financial impact as well. Another interesting point to remember is that any amount of debt that is forgiven is considered taxable income by the Internal Revenue Services.

It is not rare to seek debt relief options. Those struggling to get out of the hole or maintain a healthy financial life, it is important they address the issue carefully and with much knowledge. Filing for bankruptcy could be a real option for the individual if other debt relief options are not in their best interest. No matter what process they take, it is important to do it with care and knowledge.

Source: The Washington Post, "For debtors, no shortcut to the debt-free road," Michelle Singletary, July 15, 2014

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