Web Extra: The Downsides of Debt Reduction

Ridding yourself of debt is one of the smartest money moves you can make. But, like everything, there’s a right way and a wrong way to do it. John Ulzheimer ranks the three worst methods of debt reduction:

1.Bankruptcy. It destroys your credit for 7-10 years, requires mandatory credit counseling and ironically is more expensive to file than ever. Some lenders won’t do business with you again if you discharge their debt in a bankruptcy filing. It is “basically the worst thing you can do for your credit,” Ulzheimer says.

2. Debt Settlement. Settlement companies are highly unregulated and many bad apples spoil the lot. It causes you to go several months late on payments while funding an escrow account which you use eventually to make an offer to credit card issuers for much less than you owe. Settlement can also lead to credit card issuers suing you and there is no guarantee they will accept any offers. It will destroy your credit for seven years.

3. Short sales. They are treated by FICO as a serious negative event like a foreclosure and show up on your credit report as either a “settlement” or “charge off,” both of which are bad.

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