Throughout our lives many of us struggle with debt, and some of us struggle more than others. Having debt at such a high amount that you can’t afford to make the payments can be extremely stressful both to your finances and to yourself. If you find yourself not able to make your debt payments any longer you have a few options including debt consolidation, bankruptcy and debt settlement.
Of these options debt settlement is one of the more popular options because you can substantially reduce the money you owe rather than taking out a loan or worse destroying your credit with bankruptcy. Let’s take a look at some of the pros and cons of debt settlement to help you figure out whether or not it is right for you.
Pros of Debt Settlement
It goes without saying that the biggest benefit of debt settlement is the fact that you can cut your debt down significantly (often 40-50% or more) all in one shot. For many people this is enough for you to get your financial life back on track and find enough income to pay off the remainder and start anew.
There are many companies that will handle debt settlement for you, and many lawyers now will handle it as well. You are also entitled to settle your debt on the phone but more often than not this isn’t a pleasant experience since most companies will aggressively pursue their money before agreeing to settle. If you don’t have thick skin then working with a company may be a better option for you.
You don’t need a lawyer to settle your debt, although having one can be helpful should you find yourself up against a large company that refuses to settle. Lawyers can help guide you through the process already understanding how it works and what to do rather than you figuring it out on your own and potentially making a mistake.
Cons of Debt Settlement
Plain and simple debt settlement can significantly reduce your credit score, not quite to the level that filing bankruptcy might do, but it’s still not an ideal way to go if you are at all concerned about keeping your credit score high. You can earn back your credit score by making on time payments going forward but there will be a period of time where your score takes a hit.
Another con is that there are a lot of debt settlement scams out there, with people and companies ready to take advantage of good people who found themselves in a bad spot. It’s important to do your research on debt settlement companies and figure out who is trustworthy and who is not. Companies like the Better Business Bureau are helpful with situations like these and will give unbiased information to help you make a decision.
Lastly one of the most forgotten about cons of debt settlement is the taxes due. When companies settle debt with you they are essentially giving you free money and Uncle Sam wants a piece of the action. Whatever amount of money you owe will need to be claimed on your tax return later that year so expect to make a hefty payment to the IRS when all is said and done.
Overall debt settlement is an interesting option if you’re really in a jam financially. It’s not for everyone and not everyone will qualify to settle but if you find yourself in an extreme financial hardship then it’s definitely an option you should at least consider.
