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Debt Management Guide 2008
Bad credit
Bad credit can hurt a consumer in many ways. Understand how debt negotiation and bankruptcy work.
Bad credit
Debt negotiators may crush your credit
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"A charge-off is not good on your credit report," says Jennifer "J. B." Bryan, founder and president of J.B. Bryan Financial Group based in Washington, D.C. That blight on your credit report would last for the next seven years.

There are also tax ramifications to forgiven loans. The Internal Revenue Service requires that lenders report cases in which they've forgiven debt of $600 or more in a calendar year. The IRS considers that money to be taxable income to the person whose debt was forgiven. After all, if a lender agrees to forgive $1,000 worth of debt, that lender is, in effect, giving you a gift of $1,000.

While the tax consequences do not necessarily mean you should avoid having loans forgiven, they are definitely something to keep in mind when weighing the risks and benefits of such a move.

Another factor to consider is that the negotiator might not be successful -- failing to convince your creditors to work with you -- leaving you not only without the money you paid the negotiator, but more months behind in your payments if you stopped paying your creditors during the negotiation process.

Then there's the matter of scam artists. "There are a lot of bad actors out there who will just take the money and run," says Jacobs. "You're paying them and not paying your creditors."

There are ways you can check on the background of a potential negotiator if you decide to go that route.  Check with the Better Business Bureau or your state attorney general's office to see if any complaints have been made against the company or individual.

Also ask the negotiator plenty of questions about his or her background. Does the negotiator have any licenses that let you know that he or she is particularly savvy about finances? Because you're putting your financial future in the hands of this person or company, you want to take the time to find out as much as you can about their expertise and track record.

Whatever you ultimately decide, steer clear of anyone promising to resolve your debt situation instantly and magically.

The bottom line is when it comes down to getting out of debt, there is no quick fix or solution.

"Some folks advertise (800) get-out-of-debt," says Jacobs. "They're selling you a dream. Getting out of debt is a very difficult, usually a very lengthy, painful process."

-- Updated: June 16, 2008
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