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The Pros and Cons of Debt Settlement

Many people today are struggling with large credit card bills, mortgages or other forms of debt. If you are seeking a way to manage your debt and regain control of your finances, you may have heard of debt settlement. Debt settlement, also known as debt negotiation, is a process in which individuals offer creditors a single payment in exchange for the creditor cancelling part of the debt owed. Through this process, some individuals become debt-free by paying just a percentage of their initial debt owed. If you currently owe a large amount of money, you may want to consider these pros and cons of debt settlement.

The Pros of Debt Settlement

First and foremost, debt negotiation is a way for you to regain control of your finances and avoid having to file for bankruptcy. Settling one’s debts is a workable alternative to bankruptcy and allows consumers to become debt-free while avoiding this “black mark” on their credit report.

Additionally, by negotiating settlements with creditors, you will also pay less money in the end. Creditors want to make deals with consumers who are near bankruptcy, because if you file for bankruptcy they may not receive any money. Because of this, they are often willing to make settlements for 20-75% of the initial amount owed. In most cases people pay about 35-50% of their original debt.

The Cons of Debt Settlement

At this point, you may be wondering: What’s the catch? One downside of debt settlement is the effect it will have on your credit report. Most creditors are not willing to negotiate with consumers until they are behind on their payments; if you are currently making a minimum payment each month, you will have to stop in order to pursue settlement. These missed payments will lower your credit score temporarily. Additionally, your credit report will show that you have settled, which may scare off future lenders.

Another negative aspect of debt settlement is the cost. Some people pay a debt settlement company or private lawyer to make negotiations with creditors. While “do it yourself” debt settlement is possible, it is usually easier to bargain for lower payments through a third party. Non-profit agencies like Advantage CCS are often the best choice for people struggling with debt. Finally, debt settlement will cost you when it comes time to pay your taxes; the amount of debt that is cancelled is considered taxable income, and it has to be reported to the IRS the following year.

Ultimately, you should analyze the benefits and downsides of settlement carefully before beginning this process. Debt settlement can be a smart move, but it should not be undertaken lightly. If you are in over your head, contact Advantage CCS today. Our non-profit consumer credit counseling service can help you take the right steps to help you get your debt under control and get you on the way to financial freedom.