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Is debt relief worth it? Here's what experts say

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Wondering whether debt relief is worth it? Find out what the experts say about it. Getty Images

Despite inflation declining from its peak, Federal Reserve Chair Jerome Powell emphasized last week that inflation "remains too high." Powell also warned that the Fed is "prepared to raise rates further if appropriate, and intent to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective." 

A recent CBS News/YouGov poll also revealed that 65% of Americans view the U.S. economy as bad, compared to 29% who rate the economy as good. The data suggests that Americans are skeptical toward the economy despite some positive signs, such as GDP growth and rising wages.

One reason for consumer skepticism is that Americans are still struggling with high prices. And, with interest rates rising, many are dealing with larger credit card payments. There are numerous options to deal with your debt, which include devising a debt management plan (DMP) with a non-profit counseling agency or taking out a debt consolidation loan.

Debt relief companies also provide services that may help you lower your debt. These firms, also called debt settlement companies, evaluate your financial situation and help you devise a plan to reduce your debt burden. Often, this plan includes negotiating with your creditors to pay a reduced amount to settle your debts. But is debt relief worth it? Here's what the experts have to say.

Buried by high-interest debt? Explore your debt relief options now.

When debt relief is worth it

Debt relief may be worth considering for those who struggle to manage their debt payments. 

"Debt relief is often worth it if a borrower has more debt than they can afford to pay back within a reasonable time frame," says Leslie Tayne, a debt relief attorney in New York. "In this case, debt relief can alleviate that burden and allow the person to get back on their feet, ending the cycle of borrowing and struggling to keep up with payments."

Debt relief companies typically negotiate with your creditors to agree on a reduced amount to settle your unsecured debts like credit cards and personal loans. 

"By working directly with creditors, we can offer an affordable option to pay off that debt faster with a monthly payment that fits within their budget," notes Dr. Kate Mielitz, an accredited financial counselor and program counselor for debt resolution firm Beyond Finance.

Mielitz adds, "People generally turn to debt resolution when they can't afford multiple minimum payments. These companies often provide peace of mind for customers who aren't comfortable negotiating with creditors, don't understand their rights or have the time to negotiate debt when they've had an unexpected financial hardship."

While debt settlement can decrease your debt, it can also damage your credit score and lead to potential tax issues. 

Joseph Camberato, CEO of National Business Capital, which serves as a lending platform for business owners, offers this perspective: "If you're teetering on the edge of considering bankruptcy, debt relief could be a smart move. The impact on your credit score resulting from a debt settlement is far less severe compared to the blow dealt by a full-blown bankruptcy."

Learn more about your debt relief options here.

When debt relief isn't worth it

While settling your debts for a reduced amount can help you pay off debt faster and regain your financial footing, it's not for everyone. 

"Debt relief should be your last resort, reserved just before taking the step toward bankruptcy," Camberato says. "It's a big hit to your credit score, and the road to recovery demands years of consistent payments, prudent credit utilization and sensible spending."

Because of the credit and tax implications, debt relief may not be worth it if other options are available. 

"Debt relief may not be worth it for someone who has the income and/or assets available to pay their debt in full," Tayne says. 

Debt relief can help in the long term, but be aware of the credit issues and other challenges you could encounter.

When a debt resolution company negotiates a settlement, the interest and fees stop, and paying the negotiated amount settles your debt. 

"Once settled, the accounts will show 'settled in lieu of full payment' on the credit report," says Mielitz. "This communicates to creditors that the account was legally satisfied but not fully paid." 

You may also owe additional taxes when you file your income tax return, as any forgiven debt can be considered taxable income by the IRS.

The bottom line

Deciding if debt relief is worth it depends on your financial situation and should generally only be considered if you've exhausted your other options, experts say. If you do proceed with a debt settlement company, it's critical that you work with a reputable firm. 

Mielitz informs consumers that "a reputable and responsible debt settlement company will only charge fees once an account is settled. Do not work with that company if you're asked for payment upfront."

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