Debt Settlement Pros And Cons
Debt Settlement Pros and Cons: Should I Settle My Debt or Not?
So you’re struggling with debt and looking for options. Debt settlement has come up as a possibility. Good idea? Bad idea? Let’s weigh the pros and cons so you can make an informed decision.
What Are Some Potential Pros of Debt Settlement?
The ability to settle the debt for significantly less than the full amount owed can certainly seem like an appealing and attractive option at first glance.
Here are some of the commonly touted benefits that make debt settlement enticing
Pay a fraction of your actual balance
The primary goal of debt settlement is negotiating with creditors to accept a fraction of what you owe in order to call it even. Many people settle their debts for 50% or even much less than the original amount, which can mean huge savings.
Structure affordable payment amounts
Because you are paying considerably less than you originally owed overall, debt settlement companies can divide the total settlement amounts due into much more manageable monthly payments that realistically fit into your budget.
Resolve debt faster
Since debt settlement involves paying lump sum settlements that are less than your full balances, many peoples’ debt can be eliminated much more quickly – often within 2-4 years – compared to paying monthly installments over multiple years.
Settling your debt for less allows you to take care of what you owe and satisfy creditors without having to declare bankruptcy. For the majority, this is strongly preferred over the stigma and long-term effects of bankruptcy.
Peace of mind
Finally getting out from under the crushing weight of large amounts of debt, regardless of the method, can relieve a huge amount of mental stress and improve both physical and emotional health and well-being.
But Also Know the Potential Cons
While settling debt often seems like an easy or quick way out of a financial mess, it’s very important to have clear eyes going in regarding some of the potential drawbacks and downsides you may face
Once accounts become delinquent, creditors and third-party collectors will begin aggressively pursuing you for payment. Lawsuits against you are a very real possibility that can lead to wage garnishment.
Collection calls and lawsuits
Owe taxes on settled debt
If the amount of debt forgiven through settlements exceeds $600, the canceled portion may be considered taxable income by the IRS. Failing to report this could lead to penalties or audits, so consult a tax professional.
Creditors are not obligated to accept any settlement offers. If they refuse, you'd need to find another solution but your credit is already severely damaged.
Risk settlements falling through
What Types of Debt Can Be Settled?
Debt settlement primarily focuses on unsecured consumer debt like credit cards, medical bills, personal loans, and other flexible forms of debt. Student loans, auto loans, mortgages, and other secured debt cannot be settled through this method. The best candidates for settlement have $10,000 or more in debt spread across multiple accounts.
Is Debt Settlement Ultimately Right for You?
At the end of the day, debt settlement can be a viable solution for handling large amounts of unsecured debt like credit cards, medical bills, or personal loans. The people who see the best outcomes are generally disciplined individuals with steady jobs who simply took on too much debt and can’t keep up with ever-growing monthly payments no matter how hard they try.
If you go the settlement route, go into it with a clear vision, understand the risks and commitments, thoroughly research reputable companies, get everything in writing, and consult tax/legal professionals when needed. While debt settlement can provide substantial savings and debt relief, it also comes at a cost. Look closely at all options and choose the debt resolution approach that makes the most sense for your unique financial situation.