How Debt Settlement Works: Pros and Cons

Debt settlement is an option sometimes considered by those who are struggling to pay off large amounts of debt. You may have also heard it referred to as “debt adjusting” or “debt relief”, but they all refer to the same process. Essentially, the debt settlement company will work with your creditors on your behalf in order to settle your debt at a reduced amount. Usually, the company will charge a fee for conducting this process.

If you’re considering debt settlement, here is a general idea of how the process works and what you can expect.

• Once you’ve located a company to handle your debt settlement, they will begin negotiations with your creditors in order to lower the amounts owed by you. Often, you will be instructed to stop paying your creditors during this negotiation process.
• The debt settlement company may instruct you to open an account and make regular deposits into it that can be used to pay your debt in one lump sum payment. Usually, this account will be owned by you but administered by a third party.
• Any agreement the debt settlement company reaches with your creditors must be paid on by you immediately.
• The debt settlement company will charge you a fee for their services, usually based on a percentage of how much you saved.

Once the entire process is complete and all payments have been made, all of your debt that was included in the process should be cleared. This is, of course, best-case scenario. Settling your debt isn’t necessarily the best option for you, and there are certain factors that can cause you to end up financially worse than before. Because your credit can have a big impact on your financial health and general well-being, it’s important to look at both the positives and negatives of this process before you decide. Next, let’s take a look at the pros and cons of debt settlement.

Pros of Debt Settlement

• Depending on how much you owe and how much the debt is settled for, you can end up saving some serious money.
• Settling your debt can stop collections processes if they’ve begun.
• You can fend off the possibility of bankruptcy.
• Once your debt is settled, you can save money each month with the debt payments you no longer owe.

Cons of Debt Settlement

• Once the debt settlement company has negotiated terms of your settlement, it’s important that you make all payments and make them on time. If you don’t, it is possible that you could end up in more debt than before due to late fees being assigned to your missed settlement payments.
• If a portion of your debt was forgiven, the IRS could consider it taxable income and you’d be responsible for paying taxes on that amount.
• It is possible that the debt settlement company is not able to negotiate a settlement.
• You can end up paying a lot in fees, even if the debt settlement company wasn’t able to reach negotiations with your creditors. This can lead to you not saving money, but instead spending more on fees.
• Your credit score can go down. Once you pay off your creditors, those accounts will most likely be closed. This means that your credit will show less available to use, which can lead to your score dropping.

Before you take on the debt settlement process to solve problems with your creditors, make sure you’ve considered all other options. Negotiating directly with your creditors yourself is often effective and can save you the extra fees, for instance. It’s also recommended that you speak with a credit counseling agency for advice before making a decision; many credit counseling agencies are non-profit and will charge you little to no fees for their assistance.