Pros and Cons of Debt Settlement

By: Jennifer L. Lopez, Debt.com Financial Fitness Trainer

When your debts become overwhelming, and you find it difficult to keep up with each of the monthly credit card minimums and loan payments, you may find that you need to look at other alternatives for paying down your debt. In order to avoid a damaging bankruptcy, you may consider debt settlement as an option to help you pay down your debt.

Debt settlement, also known as debt negotiation, is performed by a debt settlement organization that takes on your case and negotiates directly with your creditors to lower your debt. In turn, you agree to make one monthly payment to the debt settlement agency, which encompasses all payments to your creditors, along with a small processing fee to the debt settlement company for the costs involved with handling your case. As long as you make the agreed upon amount of payments in the plan, at the end any of the debt outside of the negotiated amount is forgiven by your creditors.

So you may be asking: What are the pros and cons of a debt settlement plan?

Pros

* A debt settlement plan may save you from a Chapter 7 or 13 bankruptcy that will stay on your credit record for 7-10 years. A bankruptcy may prevent you from a getting a loan for a car or house in the future; or, if you are offered a loan, since you will be considered high risk, you may need a large down payment, and may have to pay an inflated interest rate.

* You only make one payment per month versus numerous payments to numerous creditors.

* The debt settlement company will deal directly with your creditors, and you will stop receiving harassing collector calls and letters.

* You will end up paying less to your creditors than if you pay the debts outright. You will also avoid ongoing late fees and interest charges while you are trying to pay it down. Under a debt settlement plan, you will only have to pay a negotiated total debt amount, and the rest will be forgiven.

Cons

* You must have a steady income that will allow you to make monthly payments. If you are unemployed, for example, or your source of income is unreliable, you probably cannot commit to a monthly payment, and may have no choice, but to file for a Chapter 7 bankruptcy to dispel your debt. Unfortunately Chapter 7 bankruptcies stay on your credit record for 10 years, and affect your future ability to obtain credit.

* If you miss a monthly payment for any reason, you may get kicked out of the plan, and all debt will be immediately owed again to your creditors. Needless to say, it is vital that you make your payment in a timely manner.

* A debt settlement plan can take 2 -4 years to be completed. You will need to be committed on a long-term basis to paying your debt off.

* Any forgiven debt may be taxable by the IRS. See your tax advisor for potential implications.

Undesirable as it is to be in such a situation, if you have more debt than you can handle on your own, debt settlement may be a viable option for you. Though there are some definite disadvantages, if you are in the place to be considering such an option, it is assumed that a lot of damage has already occurred to your name and your credit. Debt settlement can allow you to effectively settle and pay your debt respectably, and bring back your good name over time.