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The Pros and Cons of Debt Settlement

If you have a large amount of debt that you cannot possibly pay off, you may be considering debt settlement. Settlement involves negotiating with creditors over the amount you owe and agreeing to pay a lower lump sum payment to settle your debt. Many creditors would rather settle for a lower balance, often just 35-50% of the amount you owe, rather than receive nothing if you file for bankruptcy. Settlement can occur directly with creditors or with collection agencies. This financial step has both positive and negative sides.

The Pros of Settling Your Debt

A great benefit of debt settlement is that it allows you to get your debt under control and avoid filing for bankruptcy. While bankruptcy cancels all of your debts, it is a permanent strike to your credit report and should always be the last step you consider.

Additionally, settlement allows you to manage your debt and pay far less than the amount you actually owe. Depending on the terms, individuals may pay anywhere from 20-75% of their debt, though most settlements fall in the range of 35-50%.

Most importantly, debt settlement allows you to get on with your life and have a fresh financial start.

The Cons of Debt Settlement

However, settlement can still damage your credit report. Reports will show that a settlement has taken place, which may make many future creditors leery. Additionally, in order for creditors to be willing to negotiate with you, you typically have to be delinquent on your payments for several months. If you are keeping up with your payments now, you may wish to consider a debt settlement alternative, as these defaulted payments will damage your credit.

Another downside of settlement is that you will likely have to pay fees, either to a private lawyer or a debt settlement company. Finally, the portion of your debt that is cancelled becomes taxable income and must be reported to the IRS. Individuals canceling a large amount of debt may not be able to afford these tax payments.

Ultimately, settlement of your debts is a financial step that has both positive and negative sides. Consider your individual situation carefully before you opt for settlement. You may want to consider a debt settlement alternative, such as credit counseling with a reputable, non-profit credit counseling service.
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