If you are struggling with a huge debt and feeling, debt settlement could be the right solution to easing your stress. This practice allows you to pay less than the amount you owe but with a one-time payment in full.
Third-party companies who negotiate with your creditor and come up with a solution to your woes typically offer debt settlement service. While debt collection is a sound option, you need to weigh both the pros and cons of this practice to ensure you make the right choice.
Below are the most common pros and cons.
Some of the most enticing benefits of debt settlement include:
- Get Out of Debt More Quickly
One of the best advantages of debt settlement is to get you out of the fix more quickly. This process allows you to pay the settlement all at once, rather than making payments for months or years. As a result, you get peace of mind to focus on bettering your life.
- Paying Less than you Owe
Thanks to the third party’s negotiations, your creditor could agree to settle for less than what you owe. They may also waive the interest fees, which further lowers your debt. Besides, debt settlement is the only financial debt resolution that doesn’t require upfront costs.
- Avoid Bankruptcy
Filling for bankruptcy is a valid solution for borrowers overwhelmed by debt to take control of the situation. However, it can severely damage your credit, meaning that you should only take it as a last resort. In addition, debt settlement can provide you with a clean getaway or give you the financial breathing room to avoid filing for bankruptcy.
- Avoid Possible Court Cases
Settling your debt in time will prevent creditors from suing you and recovering their losses. If you are successful, calls from collection agencies will stop. As a result, your phone will ring without your heart skipping a beat.
You’ll find a complete guide on debt relief at the Freedom Debt Relief website.
While debt settlement will ease your financial difficulties and potentially save you money, it’s just a life preserver that will only keep your head above the water, especially if you don’t do your due diligence. Below are the reasons why:
- Debt Settlement Fees
Debt settlement service providers always charge a fee. These fees aren’t paid as part of your debt. Instead, they go into the debt-settling company’s pockets.
- Tax Implications
If everything goes well and your creditor agrees to settle, you might still have to pay taxes on the reduced debt. As a rule of thumb, if the debt settlement results in a reduction of $600 or more, your creditor is obliged to notify the IRS. For instance, if you owe your creditor $10000 and end up with a reduced settlement of $7000, the reduced $3000 will be included as part of your taxable income.
- Ruined Credit Score
When negotiating for a settlement, your debt settlement company will encourage you to halt payments. While you may see this as a relief, stopping payments will adversely affect your credit score until you complete the settlement program and begin the process of rebuilding your credit history.
- Increased Debt
Debt settlement companies urge their clients to stop paying their debts until they come up with an agreement. However, debt negotiations aren’t always streamlined and can take quite a while to accomplish. When you stop payment, you could face late fees and more interest, further increasing your debt.
Debt settlement seems like a perfect solution for getting out of a sticky situation regarding your finances. However, to make a sound decision, you need to weigh both the pros and cons of debt settlement.