You’re deep in debt, you’re months behind in paying your credit cards, and it seems hopeless. Then you get an offer from a company that promises they will negotiate with your creditors and allow you to pay pennies on the dollar to settle your bills.
There is another variation on these offers. You receive an official-looking letter in the mail informing you that you are eligible for some government program to reduce your debt. This is nothing more than an attempt to trick you into hiring a debt management company.
Before you respond to these offers, STOP! If you follow their advice, you will end up further damaging your credit, paying that company thousands of dollars in fees, and possibly owing taxes to the IRS.
The debt management company will tell you not to pay your bills; they will instruct you to make payments to them instead. They will claim that they will hold your money until deals have been made with the creditors. They will hold off on paying your creditors – they actually want your credit score to go down so that it will be easier for them to negotiate with your creditors. This strategy not only further damages your credit, but it also causes your creditors to continue to harass you. Even worse, they may initiate legal actions against you, resulting in garnishments, your bank account being seized, and liens being placed on your property.
The credit card management company will collect their fees up front. Many of these companies could disappear with the money that they are holding to pay your creditors. If they do make settlements with your creditors, they will charge you additional fees. Any debts which are reduced will be reported by the credit card companies as unearned income, resulting in income taxes owed by you. If you can prove that you are insolvent, you may not be required to pay those taxes; however, this burden is on you.