Pros and cons of debt settlement.
There are advantages as well as disadvantages to debt settlement and find some of the pros and cons below. While the approach can be beneficial to most people, there are some risks to the process. Learn the pros, advantages and cons to trying to settles debt with a creditor.
Debt settlement, a term that often surfaces during financial hardship, is a process that allows borrowers to negotiate with creditors to pay a lump sum that is less than the total amount owed on a debt. This approach can be a viable option for individuals struggling with overwhelming debt, offering a chance to reduce their financial burden and start anew. However, it's essential to understand the intricacies of this process, its potential benefits, and its risks.
Many borrowers want to know if using a debt settlement company or taking the approach themselves is damaging to their credit or has long term disadvantages. There are pros and cons to trying debt settlement. A settlement is recommended for some some borrowers, but it may not be the best option for everyone. Some other options to go over before considering debt settlement is to review programs such as the Consumer Credit Counseling Services and also credit card hardship programs.
Pros of debt settlement
Trying for settlement with a lender, whether a credit card company, hospital, doctor or someone else can be beneficial in some cases. Some of the many benefits of debt settlement include the following:
Debt settlement may prevent bankruptcy: If someone is successful with the process they can eliminate a large percentage of their unpaid bills and any debt burden. This will then allow the individual to pay off the remaining balance on their bills, and do it somewhat comfortably, over a usually extended payment period. They will not have the threat of bankruptcy hanging over them.
- To start this process people can negotiate directly with a collection agency or creditors to avoid bankruptcy. The primary goal is to try to settle your debts for only as much as you can afford to pay. Or you can use the services of a third party, such as a debt settlement company or non-profit credit counselor. If you settle your debts this way, out of the court process, then you will not need to file for bankruptcy protection.
Single payment: You will have to make just one, single monthly payment to the settlement company instead of paying multiple bills to different creditors each month. This simplifies the individuals bill paying process and reduces the risk of further delinquencies. The monthly payments made are accumulated into a trust account that will be used to pay off your creditors when the negotiations are complete. This will help you avoid the stress of paying various debts at different interest rates at a different times. You will also not longer need to deal with several different creditors at the same time.
Settlement will stop unfair or illegal collection practices. It will allow you to avoid unfair harassment and collection practices by debt collectors if you negotiate a settlement. They will stop calling as the amount that you owe will be greatly reduced and the clock on when the money is due will be “reset”.
Eliminate extra fees and charges: The debt settlement company should be able to eliminate late payment fees, overdraft charges and extra costs, if you have any. Any over-the-limit fees on credit cards or bills can also be greatly minimized, if not eliminated by way of the settlement process.
Avoid legal actions or a lawsuit: Creditors or debt collectors can file a lawsuit against you, get a judgment order, garnish your paycheck or wages, or place lien on your property. You should be able to avoid such legal actions and lawsuits if you're in a settlement program. Settling a debt can provide relief from constant calls and letters from creditors and collection agencies. So the settlement program will in effect offer you help with debt collectors.
There are many positive reasons to use a debt settlement company as well. Always be sure to consider these pros as well when making a decision. A reputable debt settlement company is full of experienced professionals, or even lawyers, who can provide you with top notch service. The counselors, whether non-profit or fee based, are familiar with the settlement process. Learn how to get lawyers near you to settle debt.
- These companies have the relationships, and the ability to negotiate as there are several key aspects to the negotiation the company will need to put into practice on your behalf. As debt settlement is all about persistence, skills and ability.
- A firm will have good relationships with various banks, lenders, and creditors, so their chances of being successful are improved. In addition, it can be very stressful, so by letting others expend their effort and time in settling your credit card debt will reduce you stress and can free up your time for other activities.
- After you review different companies and determine this is your best option, make certain you read, question, and fully understand all the terms of the program, any settlement plans and agreements before signing a contract. Also, get everything in writing, and keep copies. After your debt is settled make certain the account is marked closed on your credit reports and reported to all credit bureaus.
Cons of debt settlement
As indicated above, missing the couple of payments that generally leads to debt settlement will negatively impact your credit rating. After all, credit card issuers, BNP, loan companies, or banks settle for less than they are owed when they think you are in financial hardship. This means a creditor will not offer debt settlement to someone who is paying on time and not under duress. The issuers and banks are just trying to minimize their losses, like any business does.
- After you have finished the debt settlement plan, it will be indicated on your credit report as a paid settlement or some other type of similar entry. There are numerous factors that impact your credit scores, so it is not possible to isolate the exact impact. But in almost all cases, settling debt, or eliminating some of what is owed to a lender, will reduce the borrowers FICO scores. Settled debts are often reported as “paid-settled” on credit reports, which can be less favorable than “paid in full.”
For example, depending on how long ago you settled the debt when combined with other bad entries on your credit report, your age, frequency, the balances on your other credit cards, the severity of other bad debts, the age of the credit file, the timing of your payments, and other factors that go into your score will determine how much the settled credit card debt affects your ratings.
Regarding your ratings, while debt settlement will lower your credit and FICO score if you use the services offered by a debt settlement program or company. Note this may not be the as bad as it sounds when considering alternatives. People also need to keep in mind that if you can’t afford to pay your credit card debts and either pay late or miss payments, that your credit scores will be hurt by that as well. Learn more on free counseling to fix credit.
Also, it is possible for a debt settlement company to possibly create or increase some problems rather than solve them. For example, you need to be on the lookout for unreasonable monthly charges and service fees. Shop around. Be aware that some companies will even try to charge you with enrollment fees even before they do any work on your behalf. These various fees and monthly charges are in addition to your unpaid credit card debt borrowers owe.
- These fees and extra costs may put you further behind in your efforts to pay. Remember that any money, fees, and charges that you pay to a debt settlement company could actually be used to pay off the debts you owe, so before you sign up, consider what the best use for your money is.
Some settlement programs also have a high drop out rate or are unsuccessful. So if you review the plan and sign up, be sure you conclude it. As if you drop out, it doesn’t accomplish anything other than make debt settlement company more profitable and make any fees you paid as being wasted. Creditors are not obligated to accept settlement offers.
Be sure the debt settlement arrangement is affordable. Part of the program you agree to may also include a monthly payment that you make directly to the settlement company instead of it being paid directly to your credit card company. If this is the case, be sure to make certain this monthly payment is affordable to you and also realistic. The payments will usually be held in escrow to use for the settlement of your credit card debts. Ask for how long and how many payments you need to make, as too low of a payment will mean a longer time frame until the debt is eliminated.
The tax impact of debt settlement is an important cons to consider, as it can have negative financial implications for the borrower. When a debt is settled for less than what is owed, whether credit card, medical or something else, the IRS generally considers the forgiven amount as income. This is known as Cancellation of Debt (COD) income. For example, if you owe $20,000 in credit card debt and settle for $10,000, the $10,000 difference is typically treated as taxable income. This means it needs to be reported on to the IRS and borrower will need to pay some of that they saved from settlement to the government.
So the above list of items are just some of the cons. Note some of these can be offset on rare occasions. This may be the case for those who are able to sign up directly with the credit card company rather than go thru the settlement company. Learn more on settling credit card debt.
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