Are you thinking about using debt settlement to help relieve your financial stress? Well, it could be a good option for you, or not!
You need to know all the benefits as well as drawbacks first before you pursue this form of relief. So let’s take a look:
The Pros For Debt Settlement
And the number one reason, and it’s the best reason, frankly, is the savings, the money that you spend on it is less than what you owe.
So what you can accomplish with savings is going to vary from one creditor to the next.
But let’s just for a minute assume you can save half or a little under half of what you currently owe on your credit card bills and some other types of debt. That is a big benefit!
Next is time.
When you compare debt settlement to if you were to continue to make minimum payments for the rest of your balance (check your statemets for this information), you will see that settlement will clear you of debt a lot faster. Like ten, fifteen, twenty or more years faster.
So you save a ton of time when you’re doing settlement because you’re not paying back that full balance and you’re typically doing it in a lump sum.
So, on average, you’re going to have many, many, many years off of how long it’s going to take you to get out of debt.
And when you compare debt settlement with other options like debt consolidation, especially credit counseling, they have a fixed period of repayment of five years or sixty months, sometimes less, where settlement, you can be done in a month if you can get your hands on the money..
Next, another pro and it’s self-explanatory, it can help you, debt settlement can avoid bankruptcy. Now, sometimes bankruptcy is the best solution and can’t be avoided. But yes, it absolutely provides you an alternative to bankruptcy.
This next one is one of my favorite reasons to choose settlement over other alternatives, and it’s the number one ingredient that it has over almost any other version of debt relief ,and that is that it’s flexible.
That’s the biggest pro besides savings, as far as I’m concerned, money that you save settling debt is that it’s, you’re not on a fixed payment like you are in a consolidation.
Right? Whether it’s through repaying a consolidation loan, balance transfers, working with a credit counselor, and you’re not on a fixed payment in a Chapter 13bankruptcy.
But you might be able to save up and do settlement over six months.
You might be able to save up and do settlement over 12 months, 13 months, 14 months,15 months, 24 months.
It’s got the flexibility built in there for you to have a setback. So flexibility in settlement is the best attribute of it when you compare it to the other alternatives that are very fixed and do not have that flexibility, which is why you can start some of these other options and never complete them because they’re inflexible.
Settlement is actually better for you, depending on certain goals. So if you’re trying to do a mortgage or your life plan is that you want to get qualified for student loans, either for yourself or for a loved one like a parental plus loan, you are going to find that you don’t want to have filed chapter 7 in the last couple of years.
Because you are not going to be able to get federally backed student loans for a certain period of time after having filed chapter 7, or if you’re involved in a chapter 13.
And you’re also not going to be able to get FHA approved type of underwriting standards for a home loan, which are some of the most flexible, and interest rate benefit, after having filed the chapter 7 for a couple of years too.
So, if you got some specific goals, then you’re going to be able to accomplish those goals while settling and getting rid of debts that wouldn’t be able to do in other scenarios.
Debt Settlement Cons
The drawbacks are not talked about openly by people that pitch settlement as a debt relief option, because that’s how they make their money. But the reason you might want to avoid is credit scores and credit reports.
All right, so here’s the problem with credit scores and credit reports. Basically you have to fall behind on your payments first. You’re not going to settle with any creditors if you’re still current with them. So you’re going to get your credit dinged.
How important is that? You have to decide that for yourself. You have to know going into this thing that your credit is going to get trashed.
So as long as you recognize that, for you, getting out of debt is way more important than trying to have your credit score then debt settlement is not necessarily a bad way to go.
But if you think your credit score is more important than anything else, this is going to trash it, so just know that your credit actually bounces back, and for some quicker than you could possibly imagine.
In fact, depending on your situation, the amount of debt you have, the accounts that you’re going to keep current, you might bounce back very quickly from settlement.
And then for others, it’s going to take a couple of years for your credit to bounce back. Be prepared for it, get out of debt, it’s okay.
Next is debt collection calls. They come in fast and furious and the collection notices come in the mail too.
But you have to know that if you’re not paying your creditors, first, the banks are going to start to reach out to you in their recovery efforts and then the third party debt collectors that get your account are going to be reaching out to you, potentially debt buyers.
So, you’re going to be dealing with an influx of that kind of collection effort and it’s debilitating to some, not even debilitating to others.
Another con for a lot of people will be that you will have to pay taxes on forgiven debt.
If you settle a debt, and in that settlement, you save more than $600, the creditor or the collector is supposed to report that to the IRS the followingJanuary, and you’ll get a 1099C. They send it to the IRS, so the IRS is expecting you to account for it.
And if you are taxed on that, it’s going to be at the rate that you’re typically taxed. But you can avoid that tax if you are what’s deemed technically insolvent.
Make sure and check that out because if you owe more than you own, you might not owe the tax and for a lot of folks, that’s going to be the case.
Next con is that you can save more by filing chapter 7 bankruptcy than you can in settlement.
The National average for a Chapter 7 bankruptcy is about $1,800. That’s the attorney fees, court costs, everything involved.
Assume for a moment that you owe $20,000 on credit cards and you settle for half, that’s $10,000compared to $1,500, all right? So it is a cost thing, so Chapter 7, if it works for you, is by far and away going to be the least expensive given that example.
Now, one of the benefits of settlement is that you can go through it quickly and you have that flexibility.
One of the drawbacks is that, unless you’re in a position to come up with all the money you need to settle your debts inside of 90 days, not going to be able to compete with Chapter 7 for time either.
So this is the last con for settlement is that whatever the time is for you to get where you need to go and get the money in and the resources to settle each debt, is it 90 days? Because bankruptcy can be over that quickly.