What Are The Debt Settlement Pros And Cons?
Like many things in life, there are both pros and cons of debt settlement. Depending on where you are financially, there can be benefits of debt settlement, but those benefits could also be offset by unintended financial hardships.
Maybe you’ve taken out a loan or two, only to find yourself overwhelmed by high debt payments? Maybe you’ve worked your whole life, retired, and are now living on a fixed income, and something has created a financial burden that has left you in significant debt?
Whatever the cause, now you are worried, scared, and unsure what could possibly help you get out of debt.
Unfortunately, we see this happening to more Americans today than you might think, leading to far more sad financial stories than should be the case. Indeed, many people make mistakes financially that unknowingly steal years of cash from their future because of minimum payments combined with high-interest rates.
Credit card debt is one of the leading sources of debt in America today. This is closely followed by student loans, personal loans, and car loans. According to a survey, the average American has around $38,000 in debt, excluding home mortgages. Alarmingly, this figure keeps rising.
Perhaps when you first started your financial journey, you had the right intentions and even made plans of settling the debts before they got high.
Now, you find yourself still trying to pay off debts that you have gotten yourself into ten or maybe even twenty years ago. Maybe now you’re even in a place in life where it seems as though a life without debt is totally impossible — a pipe dream that doesn’t apply to you.
If you are trying to find the best way to get out of a financial hardship resulting from unsecured debt, then it is a good idea to consider the entire range of options available to you, including all of the possible debt settlement pros and cons.
Not only might debt settlement provide much-needed debt relief options from creditors and debt collectors, but it might also help you reach your end goal of multiple credit card payoffs for a stronger financial standing in the long-term.
Perhaps you’ve read debt settlement success stories about people overcoming their financial situation, paying off tens of thousands of high-interest debt. However, you know you’re unable to come with any extra cash to accomplish what those people have, leaving you feeling totally stuck.
I am here to tell you that it is ok — there can be a way out of your debt, even though it may feel like there is no way.
If you’re struggling to keep up with your credit cards or loans, now might be a better time to seek the help of a debt settlement company and get into debt settlement programs that work for you rather than against you.
For sure, it won’t be easy at first, but it can be worth it in the end if you are willing to go through and follow the right debt settlement program.
So, let us begin breaking down the debt settlement pros and cons so you can start breaking down your debt. We will cover the key information you need for making the best decisions for your particular situation to get out from under the weight of debt and start living financially free again!
What Is a Debt Settlement Company?
A debt settlement company (also known as a debt relief company) acts as an intermediary between you and your creditors.
Debt settlement companies employ top negotiators who will contact your creditors on your behalf to negotiate debt settlements with much better payment terms in order to resolve your total debts in a shorter amount of time.
The best debt settlement companies will also advise you on the various options available for you in terms of debt management and money management, as well as discuss the pros and cons of each to help you make a more well-informed decision.
Debt settlement is a good option if you just can’t afford to pay what you owe anymore due to a financial hardship that’s largely out of your control.
How Does Debt Settlement Work?
Have you been trying to learn exactly how debt settlement works? Well, read on!
A debt settlement program is an agreement between you and your creditors designed to help you get financial relief from your high-interest credit or loan payments.
When your creditors or credit card companies agree to your debt settlement program, you will receive the terms regarding how long it will typically take to pay off your outstanding unsecured debts, along with the minimum monthly payment you will need to pay for this debt payoff time frame to be possible.
It is important to know that not all debts qualify for a debt settlement program. But if your particular debts do qualify for the program, you will most likely be granted a dedicated savings account as part of the enrollment process. This account is based on your total debt amount that is enrolled and how much you will need to be saving in order for the debt settlement company to start the negotiating process with your creditors.
Sometimes your creditors ask for a single lump-sum payment as part of the agreement to settle, while other credit card companies will allow you to set up a payment plan for the agreed-upon debt settlement amount.
Once you’ve built up enough funds in your dedicated savings account, the negotiators at the debt settlement company can then start to negotiate down your debts with your creditors on your behalf to get the best settlement possible.
Financial pressure can be terribly stressful, so it’s reasonable to assume everyone wants results as fast as possible. But, if you do not have significant funds in the savings account for the program, it will most likely take longer to settle your debt than you’d prefer.
Keep in mind that you will still be paying off your debts, whether in a lump-sum settlement or over time with minimum monthly payments.
A debt settlement does not wipe your debts clean like filing for bankruptcy, and it definitely is not one of those “too good to be true” schemes. It’s simply a new payment arrangement different from the original one you made with your lenders.
You will need to stick with the settlement program to make this work by paying off your debts, just at a lower amount and generally much faster than the original lending agreement.
Once you’ve completed all of the terms of the debt settlement agreement, your debts will all be settled, and you’ll finally be ready to start fresh on a new chapter financially!
This all sounds pretty good… right? So, what are the potential downsides to debt settlement?
Debt Settlement vs. Bankruptcy: When it comes down to it, what are the debt settlement pros and cons?
Well, for starters, there are numerous pros to pursuing debt settlement as a means of reducing your current financial hardship.
It is, without a doubt, one of the quickest and most cost-effective ways to get rid of that stubborn debt without seeking the help of bankruptcy attorneys. Bankruptcies can be very costly, along with sometimes being a lengthy process, and some folks are still denied having their debts cleared by the court. There’s also the impact on credit reports — filing for bankruptcy can remain on your credit report for up to ten years, costing you thousands in higher interest if you do get a loan.
Once you’re enrolled in a debt settlement program, you can be assured you’ll be debt-free in as little as 12 months or 3 years as long as you stick to the plan. You will be able to sleep better at night knowing you’ve finally taken a step to gain control over a stressful financial situation.
Of course, how long it takes to complete the debt settlement program will depend on how much total debt you owe, the total number of creditors included in the settlement agreement, and how much you’re able to save in your debt repayment account.
No matter how long it takes to pay off your debt settlement program, it can’t compare to never knowing exactly when the stress of being unable to keep up with your debt payments will end.
Here are some more debt settlement pros to consider.
The Pros of Debt Settlement
Let’s list the pros of going the route of a debt settlement or debt relief program.
In a debt relief or debt settlement program, you are typically set up with one lower monthly payment that you’re certain you can afford. When you pay all the way through the program, your debts are resolved and typically settled for less overall than if you had tried negotiating with the lenders directly, one by one.
Debt settlement programs do come with a number of benefits. Often, debt settlement is the first step to financial freedom for people who feel they have no other way to get their financial life back on track.
When you settle your debt through a reputable debt relief company, you will be able to do the following:
Lower The Total Debt Owed
Settling your debts through debt relief, sometimes referred to as using a debt settlement company, could resolve your debts in a shorter amount of time, largely because your overall debt can be significantly less than the amount of debt you owe.
Because your debt settlement company will negotiate a settlement that is lower in comparison to what you currently owe your creditors, you will only pay the amount agreed to in the settlement and nothing more. This often means huge savings on your debt.
When you enroll in debt relief programs with debt settlement companies, they turn their professional debt negotiators loose on your creditors, who then negotiate down your debts on your behalf, making it possible to settle your debts for far less, cutting through the high late fees and extra interest tacked on by creditors when you defaulted on your original credit agreement.
That said, nothing amazing happens overnight, but in a few short years, or sometimes only months, you may be able to have your debts fully resolved and paid off for good.
Settling your debts may be a better option than filing for bankruptcy, depending on your overall financial situation.
Everyone’s financial circumstances are different, so that’s an important part of the process to discuss with a debt relief expert to make sure that debt relief or debt settlement truly is the right solution for your scenario.
Filing for bankruptcy is never an easy decision, not only because of the huge impact on your credit but also because you might even have to lose some of your assets as part of the legal settlement with your creditors to repay your debts.
This is one of the biggest differences between bankruptcy and debt settlement programs — debt settlement allows you to keep your assets while providing a more comfortable repayment arrangement with your creditors. With bankruptcy, that’s a major unknown and huge downside when it is the case.
Get The Debt Collectors And Creditors Off Your Back
Being hunted down by creditors or credit card companies is never a good experience. Embarrassing phone calls and letters being sent to your house, and sometimes even to your friends and family. All you want is for them to leave you alone so you can work to pay them off. A debt settlement program can help you live stress-free again, ending harassing calls and letters and getting you back on track financially.
Get Out Of Debt Fast
Debt settlement is one of the best and fastest ways to get out of debt.
The key point here is to remember the more funds you can build up in savings prior to the settlement, the faster the entire process will go and the sooner you’ll free yourself from the debt. As soon as you have contacted a settlement company, it’s time to start saving.
Enjoy A Flexible Payment Arrangement
The company will negotiate a specific amount of time to clear your debt, sometimes for up to five years.
The best thing about this is that your debt will not accumulate additional interest charges or late fees once you’ve entered into the debt settlement agreement.
The Cons of Debt Settlement
While there are plenty of advantages when you examine debt settlement pros and cons, unfortunately, it’s important to be sure you look at the cons as well.
There are many factors that can affect the success of your debt settlement. Sometimes, these factors may be completely out of your hands, so it’s key to be aware of them, so you aren’t blindsided at the worst time. Here are some of the cons to a debt management program.
The Creditors May Refuse To Negotiate
There is a possibility that your creditors may refuse to negotiate. After all, they’re under no obligation to write off your debt.
However, considering being paid something is better than being paid nothing at all, your creditors will most likely be willing to accept some sort of settlement offer from you.
When it comes to negotiating a credit card payoff, Dave Ramsey makes an excellent point about why creditors will most likely settle with you in one of his YouTube videos, giving an example:
“If you had a guy that owed you $40,000 from 15 years ago, and he hadn’t ever paid you a single payment on the loan…
If he called you up today and said, I’ll give you $4,000 for that $40,000 debt that I owe you.
Would you settle it?
I would think you’d say… YEAH!”
It Could Negatively Affect Your Credit
You should start saving more money each month into a separate savings account so that you will have a solid amount of funds saved up for the companies negotiators to use as leverage in their negotiations on your behalf for a settlement with your creditors.
Of course, that’s easier said than done. If you had extra money after paying your bills, you probably wouldn’t be in this situation, to begin with, right?!
That’s why, in some cases, people stop paying their creditors prior to a debt settlement agreement in order to have more funds saved up for settling their debts.
Unfortunately, if you do miss payments, those late payments will likely show up on your credit report.
If you are wondering, “how long will a debt settlement hurt my credit report?” the answer is a debt settlement program might stay on your credit report for up to 7 years.
However, the good news is, having your accounts listed on your credit report as “settled” has a far less negative credit impact than if it were to stay unpaid.
And moving forward after your debt settlement, if you continue displaying good credit behavior, your credit will slowly begin to improve as your old negative credit marks become less relevant.
You should also consider that if you currently have a high debt-to-income ratio, that fact alone may already be keeping you from having credit extended to you, even if your credit score is still good (for the time being).
If the process of entering into a debt settlement program takes longer due to a lack of sufficient funds for leverage in your debt negotiations, then you may run the risk of getting sued by your creditors before the debt settlement is finalized.
With that in mind, some of the best debt settlement companies offer a litigation option for protection against this.
More Debt And Taxes
Late or delayed payments to your creditors can result in heavy fees and interest being added to your total debt.
Also, if you do stop making payments and your creditors fail to reach a debt settlement agreement, you might end up paying more than you should have.
If an agreement can be reached with your creditors, the forgiven debt can sometimes be considered taxable income, and you may have to pay taxes on the debt reduction amount when you receive an IRS 1099-C cancelation of debt form from the creditor.
Depending on how much your total savings are when you enter into a debt settlement, the amount you may have paid overall on your canceled debt could be minor compared with the amount it takes to resolve your debts.
You’ll find this is often true by comparing how much you are already paying for interest rates on your loans or credit cards every single month.
While a debt settlement company is not able to charge you an upfront fee, if your debts are settled while you’re using their negotiators and their program, then you may be charged a fee for settling your debts.
For example, if you have more than 2 creditors and only one has agreed to settle, you will have to pay the settlement fee for that one creditor, the first repayment installment, as well as the loan installment for the remaining creditor.
Debt settlement and debt relief companies should not charge you a fee until they have reached a settlement agreement that you have also agreed to.
However, they are still a business, and you’re using their top negotiators to settle down your debts with your creditors for major savings.
Although it’s technically possible to settle your debts on your own without a fee, getting the help of a reputable, proven debt relief or debt settlement company that gets you results could be worth paying for.
Now that you know the details about the pros and cons of debt settlement, what happens after debt settlement?
Excitement. Because now you have resolved your debts and taken control to get back on your feet financially!
What to Do After Debt Settlement
After you have settled your debts and completed your debt settlement program, you can start rebuilding your consumer credit to get your credit score back up.
This will be the most crucial time for making better choices when it comes to money management so that you can start countering the negative effects made by your past debt problems.
This means that you will need to start building your credit immediately.
Here is what you need to do:
- Try to have no more debts or keep them to a minimum
- Do not sign up for a new credit card or open a new account for at least 6 months
- Make all your payments on time
- Maintain your old accounts and keep them in good standing open
- Make sure your credit utilization ratio is below 30%
Once you have completed paying off your debts, including any debt of the settlement program, you can open a secured credit card.
This will show that you are responsible and that you are able to make monthly payments on your credit accounts, helping you rebuild your credit.
And of course, be extremely careful that you do not go back into debt and repeat the process all over again!
What to Consider When Choosing a Debt Settlement Company
Dealing with debt can be challenging.
However, it is important that you choose the right debt settlement company.
Here are some features to look for when making your decision:
- A company that offers you a loan to help clear out your current debts and will work out a payment plan for you
- Available expert litigation lawyers who are ready to offer their services to you if you get sued by your creditors
- Account managers who are available around the clock and are dedicated to helping you in understanding debts and the program
When you choose a company, you should feel confident that they will be by your side through every step of your journey.
Debt Settlement Can Provide You With The Relief You Need To Re-Build Your Finances
Dealing with debt can be very stressful.
Looking for the best way out of it can also be equally frustrating.
Debt settlement is one of the very common strategies for dealing with debt today.
Remember, once you got out of debt, it’s important not to make the same choices that landed you in such a situation.
Are you in debt?
Are you looking for a professional way out of it?
We offer expert financial solutions that will help you to get back on your feet.
To speak to a financial consultant, contact us and let us help you get rid of your debt today.
Schedule Your Free Debt Analysis
Potential clients speak with a certified debt specialist regarding their financial situation.
The debt specialist evaluates the caller’s financial situation and suggests the optimal debt relief strategy.
Clients choosing to enroll in our debt relief program are then guided through the enrollment process.
Use Our Debt Settlement Calculator | Alleviate Financial
Enroll in Our Debt Relief Program
Signed enrollment documents are processed, and the new client receives a call from our team of dedicated account managers to welcome them to the program.
Account managers are available 24/7 and remain in active communication with clients throughout the program.
Talk with Us About the Debt Settlement Calculator | Alleviate Financial
Negotiations & Settlement
Our talented negotiations team begins working on client accounts immediately.
When settlement offers are received, they are first reviewed for accuracy and then presented to clients for approval.
This process repeats until all client accounts have been settled.
Your debts will be resolved in a few short years or even months so you can have a new beginning financially.