 TITLE: How Do Debt Relief Companies Work? CONTENT: Why Is Debt Settlement Risky?\n-----------------------------\nDebt settlement is risky for several reasons:\n*   **Debt settlement will cost you.** Debt settlement can get expensive due to the fees that debt relief companies charge. In addition, if a settlement company succeeds in having your debt forgiven, the sum by which they reduce your debt may be treated as income for purposes of calculating your federal income tax. So depending on your earnings, tax bracket and available deductions, you could end up paying at least a chunk of the debt that was forgiven to the IRS.\n*   **Debt settlement damages your credit.** During the negotiation process, if you've suspended payments on the advice of the debt settlement company, your missed payments will be recorded on your credit report. Because payment history is the biggest factor in credit score calculations, a series of missed payments will do serious damage to your credit. Missed payments also may be grounds for creditors to file debt collection lawsuits against you, or to sell your debt to collection agencies. Accounts sold to collections appear as negative entries on your credit report.  \n    In addition, if a debt relief company succeeds in getting creditors to reduce your obligations to them, renegotiated debts appear on your credit report as \"settled accounts,\" and can remain on your credit report for up to seven years after you've paid them off. While less severe than bankruptcy or foreclosure, settled accounts are considered negative events in your credit history. Many lenders see them as grounds for caution when considering loan applications, and some lenders may decline applicants with settled accounts on their credit reports.\n*   **Debt settlement doesn't always work.** There's no guarantee that a creditor will agree to reduce your payment obligation. If they refuse, you won't pay the settlement company any fees connected with that debt, but you'll have lost time, possibly incurred late payment penalties that increase your debt, and you may have had late or missed payments reported to the credit bureaus. END