The Pros and Cons of Debt Settlement

With virtually every decision in life, there are advantages and disadvantages.

Debt settlement is no different. There are both pros and cons to debt settlement. Debt settlement is attractive to many because so much of your debt is canceled or “forgiven.” The disadvantages to debt settlement that can make it unattractive to people who don’t want to fight an uphill battle against negative marks on their credit and have to cure an injured credit score.

Debt Settlement Advantages

1. It is possible to be debt free within 36 months.
2. You can settle your debts for less than you owe, possibly saving up to 60% of what you owe.
3. It allows  you to have lower monthly payments leaving money left over each month for you to start a rainy day fund.
4. Many times, your creditors will re-age your accounts and bring them to a current status, helping your credit score.
5. Can include all unsecured debt, and medical bills in excess of $1000 may be also be included.
6. No more open negative marks on your credit report.
7. Debts are typically no longer subject to collection or legal action.

Debt Settlement Disadvantages

1. Debt settlement companies will generally charge upfront fees along with monthly fees. They will also wait to settle your debt until you have saved enough and contributed to your account to settle.
2. Unless negotiated as part of the settlement process, your paid off debt will appear as a negative “settled” rather than “paid in full.”
3. Debt settlement is for unsecured debt only — for example, credit cards.
4. It is possible that a collector could sell remaining debt to another collection agency if you fail to obtain written notice from your creditor stating you no longer owe the debt.
5. It is possible that a portion of debt “forgiven” by the creditor is typically reported to the IRS as income.
6. You can potentially pay tax on “forgiven” debt reported to the IRS .
7. Negative marks on your credit report can continue until payments begin.

Now that we have covered the highlights of debt settlement, here is a brief video covering a few of the pros and cons to the debt consolidation options.