Debt settlement is a process where a person in debt negotiates with their creditor to pay off a portion of their outstanding balance in exchange for the creditor agreeing to consider the debt as fully paid. This option can be appealing to individuals who are struggling to make their monthly payments and are at risk of defaulting on their debt. However, it is important to consider both the pros and cons of debt settlement before deciding if it is the right option for you. Also, it can be helpful to view CFPBs stance on debt settlement.
Also, please note that the list below may not be exhaustive.
Pros of debt settlement:
- Reduced debt: The most obvious benefit of debt settlement is the reduction in the amount of debt that you owe. If you are able to successfully negotiate a settlement, you will only be required to pay a portion of your outstanding balance, rather than the full amount. This can provide significant relief to individuals who are struggling to make their monthly payments and are at risk of defaulting on their debt.
- Avoid bankruptcy: Another advantage of debt settlement is that it can help you avoid bankruptcy. Bankruptcy is a serious legal process that can have long-term consequences on your financial health, including damage to your credit score and the inability to obtain credit in the future. By negotiating a settlement with your creditor, you can avoid the negative consequences of bankruptcy and get your debt under control.
- Simplified process: Debt settlement can also be a simpler process than other options for resolving debt, such as bankruptcy. In a bankruptcy case, you will need to go through a lengthy legal process that can be stressful and time-consuming. In contrast, debt settlement can be handled directly between you and your creditor, without the need for court intervention.
Cons of debt settlement:
- Lawsuit: It’s possible to face a debt collection lawsuit while in a debt settlement program. We cover that con in greater detail below.
- Damage to credit score: One of the biggest drawbacks of debt settlement is the negative impact it can have on your credit score. When you enter into a debt settlement agreement, your creditor may report the settlement to the credit bureaus as a “settled” or “partial payment” account. This can significantly damage your credit score and make it more difficult to obtain credit in the future.
- Taxes: Another potential downside of debt settlement is that the forgiven debt may be considered taxable income by the Internal Revenue Service (IRS). This means that you may be required to pay taxes on the amount of debt that was forgiven as part of the settlement agreement.
- Fees: Debt settlement companies often charge fees for their services, which can add to the overall cost of the process. These fees may be a percentage of the total debt that is settled, or a flat fee per creditor. It is important to carefully review the terms of any debt settlement agreement and understand the fees that you will be required to pay.
- Creditor may not agree: Another potential drawback of debt settlement is that your creditor may not agree to the terms of the settlement. If this happens, you may be left with no other options for resolving your debt and may need to consider bankruptcy or other options.
Understanding the Reviews
It can be helpful to read through the debt settlement company reviews or companies that market other debt relief companies. For examples, please see the following reviews of various debt settlement companies.
- DebtBlue
- DMB Financial
- GRT Financial
- Century Support Services
- Lighthouse Finance Solutions
- Signature Servicing
- Debt Negotiation Services
- Citizens Debt Relief
- Clear One Advantage
- Turbo Debt
Can You Be Sued While You Are Enrolled in A Debt Settlement Program?
It is possible for you to be sued while you are in a debt settlement program. If you are unable to make your monthly payments and are in default on your debt, your creditor may decide to take legal action against you in order to collect the outstanding balance. This could include filing a lawsuit against you and obtaining a judgment in their favor, which could allow them to garnish your wages or seize your assets in order to pay off the debt.
However, it is important to note that entering into a debt settlement program does not automatically protect you from being sued by your creditors. It is ultimately up to your creditors to decide whether or not to pursue legal action against you. In some cases, creditors may be willing to negotiate a settlement with you rather than filing a lawsuit, but this is not always the case.
If you are considering entering into a debt settlement program, it is important to carefully review the terms of the program and understand your rights and obligations. You should also be aware of any potential legal action that your creditors may take against you and be prepared to respond if necessary.
It is also worth noting that not all debt settlement programs are created equal. Some programs may offer more protection from legal action than others, so it is important to carefully research and compare different options before making a decision. Be sure to work with a reputable and trustworthy company that has a proven track record of successfully settling debts and helping individuals get back on track financially.
How Much Do Debt Settlement Companies Charge?
Debt settlement companies typically charge a fee for their services, which can vary depending on the specific company and the terms of the settlement agreement. These fees may be a percentage of the total debt that is settled, or a flat fee per creditor. It is important to carefully review the terms of any debt settlement agreement and understand the fees that you will be required to pay.
In some cases, debt settlement companies may charge a percentage of the total debt that is settled. For example, a company may charge a fee equal to 20% of the total debt that is settled. So if you are able to negotiate a settlement of $10,000, the company would charge a fee of $2,000.
Other debt settlement companies may charge a flat fee per creditor. For example, a company may charge a fee of $50 per creditor that is settled. So if you have three creditors that you are able to negotiate settlements with, the company would charge a total fee of $150.
It is important to note that these fees may not be the only costs associated with debt settlement. In some cases, you may also be required to pay taxes on the amount of debt that was forgiven as part of the settlement agreement. Additionally, debt settlement can have a negative impact on your credit score, which could make it more difficult to obtain credit in the future.
Overall, it is important to carefully consider the fees and other potential costs associated with debt settlement before deciding if it is the right option for you. Be sure to review the terms of any debt settlement agreement and fully understand the fees that you will be required to pay before committing to the process.
Conclusion
In conclusion, debt settlement can be a useful option for individuals who are struggling to make their monthly payments and are at risk of defaulting on their debt. However, it is important to carefully consider the pros and cons of debt settlement before deciding if it is the right option for you. Be sure to weigh the potential benefits of reduced debt and avoiding bankruptcy against the potential downsides of damage to your credit score, taxes on forgiven debt, and fees. Additionally, be aware that your creditor may not agree to the terms of the settlement, which could leave you with few other options for resolving your debt.
This article was written with the help of Chat GPT.