Getting a loan approved feels like a huge win but if you aren’t able to manage it and the interest keeps piling up then things can go downhill real quick. Right now, there are millions of people in the US struggling with the burden of their debts. All the piled up interest and aggressive collection calls take a toll on your mental health especially when you are already facing a financial crisis. 

In such a situation, debt settlement really is a great financial strategy that can help you deal with your unresolved debt. However, just like any other debt relief option, debt settlement also comes with its own pros and cons. 

Before you start your settlement journey, it’s important that you weigh both the pros and cons to see if it really is the best suitable option for you to get out of debt. Let’s break it down for you; 

What Is Debt Settlement?

For those who are new to the term “Debt settlement”, it’s important to first know what it is and how it works. Well, in this process you or a third party negotiates with your creditor on your behalf to reduce the debt. You pay your creditor a lump sum amount that is less than what you originally owe and the rest of it is forgiven. Once the settlement is complete, your creditor will then report your debt as “settled”. 

Pros Of Debt Settlement 

1-It Reduces Your Debt 

If for some valid reason, you aren’t able to pay off your debt in full or if you are going through a serious financial hardship then debt settlement is the best way out. It reduces your debt which means that not only do you save money but you’ll also be free from all your debt obligations. 

2-Helps You Avoid Bankruptcy 

People often opt for debt settlement when the only other alternative they have is bankruptcy. Bankruptcy is never a good option as it comes with a long lasting impact on your credit and your financial future. This is where debt settlement comes in handy. It does damage your credit but not to as much as bankruptcy does. 

3-You Can Resolve Your Debt Quickly 

If you are in financial distress and really want to get rid of your debt quickly then debt settlement is a viable option. Mostly people have to pay a lump sum amount to resolve their debt with their creditors so yes, it definitely is a quicker solution! 

4-It Can Save You From Collection Agencies 

Collection agencies use really aggressive tactics when trying to recover money. All the harassing collection calls can be very overwhelming. Luckily, when the settlement process begins, you can have some peace of mind because the collection calls will reduce or stop entirely. 

Cons Of Debt Settlement 

1-It Can Damage Your Credit Score 

In debt settlement, the debtor has to stop making payments to the creditor before starting the negotiations. All those missed payments will reflect negatively on your credit score and the late payments can stay on your credit report for 7 years. Now a poor credit score means lesser financial opportunities. For example, with a low score, you won’t be able to get new loans with lower interest rates. Moreover, in some cases, a poor credit score can become a huge hurdle for you when you are trying to secure a new job, a house or a car. 

2-There’s No Guarantee 

Whether you opt for DIY debt settlement or hire a professional and reputable company for it, there’s absolutely no guarantee that your creditor will agree to your settlement offer or not. Your creditor is under no obligation to accept your offer and he even has the right to take a legal action against you for all the missed payments. 

3-Debt Settlement Fee 

If you hire a third party debt settlement service to negotiate with your creditor on your behalf, you’ll have to pay a fee of 15% to 25% of your total debt. This fee can eat up all your settlement savings. 

4-Tax Implication By The IRS 

If in a debt settlement, your creditor forgives more than $600, the IRS considers it as taxable income. You’ll receive a 1099-C form as a surprise tax bill after you’ve settled your debt. 

5-High Potential For Scams 

The debt settlement industry comes with its fair share of scammers. Some companies will charge you unreasonably high upfront fees and some won’t be able to keep up their promises. 

Situations When Debt Settlement Is The Wiser Solution 

You should only opt for debt settlement when it’s your last resort. Considering its cons, it clearly isn’t a financial strategy that should be used even when you do have other solutions to resolve your debt. It’s important that before you take such an important financial decision, you consult a financial counselor or a reliable debt settlement agency to ensure that you are moving the right path forward. 

Here are some situations when debt settlement can be worthwhile; 

Significant Debt: If you are dealing with a significant amount of unsecured debt like credit card debt or medical bills then yes debt settlement is a good option for you. Your goal is to reduce your debt and that’s exactly what settlement is all about. 

Financial Hardship: Debt settlement is specifically for those who are facing a serious financial hardship that’s making it tough to keep up with the monthly payments. If you are going through a similar phase then opting for debt settlement can work wonders for you. 

You Want To Avoid Bankruptcy: Bankruptcy can do more damage than debt settlement. It can wreak havoc on your credit report which is why if you want to avoid it then yes, settlement is worthwhile. 

You Can Save For A Lump Sum: In a debt settlement, you have to pay your creditor a reasonable lump sum that’s less than the original loan amount. You should only step into this process if you can easily save for that lump sum. You should never step into debt settlement if you don’t have the lump sum prepared. 

You Can Afford The Credit Score Drop: If you understand the consequences of debt settlement on your credit score and report and can afford the temporary dip then yes, settlement is worth a try. You should also be prepared to deal with the credit score and take necessary measures to improve it after your debt has successfully been settled. 

Key Takeaway 

Debt settlement can provide you the kind of structured way out that you are looking for to get out of debt but always remember that it doesn’t come without risks. There are certain consequences that you have to deal with. Moreover, you need a lot of patience for this process to complete because a settlement can take anywhere between 2 years to 4 years. You need consistency in your efforts and persistence for a successful negotiation. There are both advantages and disadvantages of debt settlement. You just have to weigh them out and decide if it really is the solution to your financial problems. It’s best to seek help from a professional financial counselor for clarity! 

FAQs

Q1. What’s The Difference Between Debt Settlement And Debt Consolidation?

Debt settlement is a negotiation to reduce your debt. You negotiate with your creditor, pay him a lump sum amount which is less than what you owe and the creditor in return forgives a portion of your debt and marks it as “settled”. On the other hand, debt consolidation is about taking up a new loan to pay off the rest of your loans. This way you’ll only have a single loan with a single interest rate to worry about every month. 

Q2. Is It Better To Hire A Debt Settlement Company?

You can opt for DIY debt settlement but only if you know how to negotiate with your creditor professionally. If not and if you can’t handle the stress of the process then hiring a debt settlement company is the better option. A reputable company will have just the right experience and expertise required for a successful debt settlement. 

Q3. Are Debt Settlement Companies Legitimate? 

Yes, there are some really reliable and legitimate debt settlement companies out there but at the same time, the industry is full of scammers too. You have to do thorough research when choosing a company to work with. Search them on the internet, read reviews on platforms like Yelp and BBB (Better Business Bureau) and visit their physical offices to ensure that the company is reliable. Most importantly, don’t work with any settlement company that demands any upfront fee. A professional company will only charge you after they’ve successfully settled your debt. 

Speaking of legitimacy, try our debt settlement services at Mountains Debt Relief. We assure you a smooth and seamless debt settlement journey with complete clarity and transparency!