Positives and Negatives of Debt Settlement

Debt settlement is by far the most sought after alternative to bankruptcy. It is a debt relief option where the creditor accepts a lower amount from the debtor which is considered full payment of the obligation. Since debt settlement rids you of your obligations almost at a qualifying amount, it can be a good strategy to adopt if you are in huge debts.



The clear cut advantages of debt settlement are as follows:


You pay less: Settlement of debts is primarily reached through an untiring negotiation process. If done efficiently, negotiation can lower your payable amount even up to 60% of the total debt amount. Debt settlement usually offers you flexible payment arrangements. Once the settlement amount is determined, you can either pay it in a lump sum or in reasonable installments.

Settlement makes you debt-free faster: Debt settlement is always preferred to paying minimum payments on debt accounts because the latter will only delay your repayment, whereas settlement will fix your payable amount once and for all. With debt settlement you are likely to become debt free within much faster. If you make you payment in lump sum, you will become debt free at once and if you go for installments, you will take a maximum of 1 to 3 years to get over with your settlement.

You avoid the bankruptcy peril: Debt settlement can be a logical alternative to bankruptcy, especially if you are in overwhelming debt and cannot afford to pay off your obligations in full.

You can do it by your own: You can settle your debts even without any professional help. If you can negotiate with your creditors effectively, then reaching a debt settlement will not be a problem. All you need to do is convince your creditors that you are facing financial hardship and that you might have to file for bankruptcy if they reject your settlement proposal. However, it is advised that you enroll for debt settlement services in order to make sure that the negotiation process is not futile.



Advantages of debt settlement abound. But in order to make an informed decision about the debt relief, you need to learn about the both sides of the coin. If debt settlement looks temptingly advantageous, then be sure, it has a flip side to it as well and you should take both into account before you go for a settlement of your debt accounts.

Here is what lies on the flip side of debt settlement:


Your credit score will be affected: Anything you do other than making timely payments on your debts will lower your credit score. Debt settlement too, like other debt relief programs, will lower your credit score. But that does not mean you cannot work on improving your credit score after debt settlement. In fact, to many people lowering of credit score seems a little price which they willingly pay in order to get themselves out of their hug obligations. All you need to do is take financially responsible decisions after settlement so a good credit score is re-established on your credit report.

Only unsecured debts can be settled: Secured loans cannot be settled. You can only settle your unsecured debts.

Debt settlement is taxable: Any amount that is forgiven in a debt settlement process is considered taxable income and the IRS will require you to pay tax on the redeemed amount.

Debts will be reported as "settled": There are high chances that your creditor will report your debt accounts as "settled" and not "paid in full" after settlement. Such reporting might lower your credit score. So, always make sure your creditor reports your accounts as "paid in full". To convince your creditor for this, do negotiate transparently and mention this condition clearly in the agreement beforehand.

It is true that debt settlement can pull you out of obligations very without much hassle. But it is also important to evaluate whether settlement the right choice for you. Many a time, you might not be able to decide which way to go, bankruptcy or settlement. It is a common fix debt consumers find themselves in. The best way to deal with it is to consult a competent debt settlement attorney, who can advise you on the matter.

Author's Bio : This article is contributed by Catherine Woodward, a Financial Writer associated with somekeyword.

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