Q: What are the risks in enrolling in a debt settlement program?

A: Debt settlement is an aggressive strategy. Instead of working with your creditors, as with debt management plans (DMPs), debt settlement has you fighting with your creditors -- sometimes, it's the only thing left to try. But as such, debt settlement does present a host of risks that every consumer should be aware of before embarking on the strategy. They include:

Damaged credit: By withholding payments and instead sending them to a debt-settlement firm, your credit will be tarnished. Ideally, you will be able to negotiate those "late" marks away, but there is a very distinct possibility that your credit will suffer even if everything else works out perfectly for you.

Increased collection calls: Once you've missed a few payments in a row, the collection calls will really start to come in. Solution: Change your phone number.

Tax consequences: Any portion of your debt that's "forgiven" or negotiated away is considered taxable income by the IRS. Beware!

Potential lawsuits: Debt settlement is an antagonistic approach to ridding yourself of debt, and as such, your creditors have every right to sue you for payment in full. The fact of the matter is, though, it's rarely cost-effective for them to do so. In reality, most threats of lawsuits are hollow scare tactics, but the possibility of landing in court is real.

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