If you’re drowning in credit card and collection debt you can’t be blamed for being stressed out. There are plenty of institutions, companies, and people who will happily take advantage of that stress by urging you to take actions which will not serve you.
Here are a few of those actions, and why you should avoid them.
#1) Taking out more loans.
Collection agents love this one. They’ll try to convince you to take out consolidation loans, home equity loans, payday loans, or title loans just to pay them.
“Robbing Peter to Pay Paul” isn’t just unhelpful. It can actively get you into more trouble. That unsecured, zero interest medical debt becomes the interest-bearing debt that gets your house or car taken away from you. Or the debt that ensures your bank account is so severely overdrawn that your balance doesn’t even reach zero when your next paycheck arrives.
You cannot solve debt with more debt.
#2) Making payment arrangements.
Once a debt goes to collections there isn’t much point in paying it. It won’t help your credit score very much, and the company you owed money to has already written off the debt.
There are exceptions. If you’re following Dave Ramsey’s debt snowball method and are paying off debts regardless of what they’ll do to your credit score, and are finding success with the program, then there can be mental and emotional benefits to doing this.
Yet if you aren’t on your way out of debt and don’t have a solid plan for handling all debts then there is no point in paying someone just because they were the loudest creditor on your phone that day.
#3) Settling debt (with exceptions).
Some creditors will try to entice you to handle debt by “settling it” for less than you owe.
Sometimes this can be a good thing. If you have a large windfall and want to use it to get debt-free and can negotiate 20% to 30% off of a huge portion of your debts at once then this can save you a lot of money. Just be careful about the source. Digging money out of retirement is a bad idea, for example, as it threatens your retirement and uses funds that bankruptcy would have left largely untouched.
When you’re fully debt-free your credit will certainly repair itself over time.
If you’re just throwing money at an offer this is less wise. Your credit report will reflect that you settled for less than you owe. Your credit score will tank even more. The other collection agents will still be calling. You’ll still be behind on all of your other bills…and now you’ve used money that you could have spent paying vital bills like your mortgage or utilities. You may have spent money that could have gone towards a more permanent solution, too.
#4) Dealing with “debt management companies.”
A lot of these companies leave you far worse than they found you.
They claim to have “special relationships” with creditors and collection agencies. They don’t. In fact a lot of collection agencies will not talk to them and will not deal with them.
They take some monthly payment from you, usually between $200 and $300. About $50 to $75 of that is their “management fee.” They may also charge exorbitant up-front fees.
They then distribute “micro-payments” to all your creditors.
Common sense should tell you that paying your creditors $1 to $5 a month isn’t going to dig you out of the hole you are in. Nor is it going to prevent you from getting sued if a creditor has decided to sue you. Worse, because these agencies tell creditors to deal with them and only with them you might not know that you’re in danger of getting sued until it’s too late.
Many of these programs are even massive scams. Don’t get taken in.
#5) Ignoring it.
Eventually, bad debt can result in wage garnishments, liens on your house, and a host of other negative consequences. Meanwhile your bad credit score will continue to raise the costs of expenses you can’t do without, such as your car insurance.
If you don’t have a solid, focused, realistic plan for getting out of debt then you might need to consider bankruptcy. Contact our law offices today to find out why this solution is the one that can save your credit, your home, your car, and your sanity.
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