Depending on your finances, debt settlement can have significant benefits, but there are some downsides that could also offset those benefits. There are both pros and cons to using debt settlement as a means of negotiating unsecured debts to a level you can manage.
Unsecured debt is one of the leading types of debt in America, causing hardship for far too many. Let’s break down the pros and cons of debt settlement so you can get the debt help you need. We’ll cover the key information for making the best decisions for getting out from under the weight of debt and start living financially free.
How Do Debt Settlement Programs Work?
At its most essential level, debt settlement programs are agreements with your creditors for a negotiated reduction in balances and restructured payments to provide relief so a borrower can still pay some portion of their debt.
Not all debts qualify for a debt settlement program. But for those debts that do qualify, they are negotiated to be paid either in a lump sum or in payments over time in exchange for reductions in debt balances.
You will also be set up with a dedicated savings account as part of the enrollment process, with which payments to creditors will be made.
Once enough funds are saved in your dedicated account, the negotiators at the debt settlement company will begin negotiating with your creditors on your behalf to get the best settlement possible.
Remember, debt settlement doesn’t clear your debts like a Chapter 7 bankruptcy. It’s only an agreement for a partial reduction in balances in return for a new payment arrangement that’s suitable for you and the lender.
The Pros and Cons of Debt Settlement
Debt Settlement Pros
Lower debt balances
Settling your debts through debt relief companies can help pay off your debts in a shorter amount of time. Their expert negotiators know the best methods for significantly reducing your unsecured debt and establishing a plan to become debt-free faster.
One of the main objectives of a debt settlement company is negotiating a lower overall balance owed to your creditors. Often, thousands can be saved in the process of debt negotiation.
When you enroll in a debt relief program with Alleviate Financial, we turn our professional debt negotiators loose on your creditors. These experts negotiate down your debts on your behalf to settle your debts for far less, cutting high fees and interest.
Stay out of bankruptcy
Settling your debts is usually a better option than filing for bankruptcy, but every financial situation is different.
The decision to file for bankruptcy should never be taken lightly because the effects on credit can last up to a decade. While Chapter 7 bankruptcy can wipe debts clean for good and give you a fresh start, it will be many years before lenders will extend you credit again.
Even worse, you may lose your most valuable assets in the bankruptcy settlement with your creditors to partially repay your debts. One of the biggest differences between bankruptcy and debt settlement programs is that debt settlement allows you to keep your assets.
Stop collection activities by creditors
Possibly the most aggravating thing about getting behind on unsecured debt is the harassing phone calls and letters all day long. Thankfully, a debt settlement program through Alleviate Financial can provide the debt relief help you need to put a stop to harassing collectors.
Get more flexible payment terms
The credit debt company experts will negotiate a set timeframe to have your debt paid off, sometimes up to five years, but usually under three years. You’ll be able to pay the debt down without any more interest being tacked onto the balance, which makes a tremendous difference in how long it takes to pay off revolving unsecured debt.
The Cons of Debt Settlement
The pros of debt settlement are numerous, but there are some cons to debt settlement that should certainly be considered when making your decision on debt relief services.
Creditors can refuse to negotiate
Creditors aren’t required to negotiate, so some may refuse to accept a debt settlement. That said, most do try to come to an agreement because they would much rather get some payment than none at all.
It can negatively impact credit
One downside to a debt settlement program is that it might stay on your credit for up to 7 years. However, your accounts being listed as “settled” on your credit report is less harmful than them staying unpaid or having a bankruptcy reported.
Once your debt settlement is paid off, continuing timely credit payments will rebound your credit score slowly but surely, and still much faster than if you’d have filed for bankruptcy.
Keep in mind, if you’re already in a tight money situation, getting even more credit right now will be difficult anyway because of your debt-to-income ratio, so having a temporary drop in your credit score will likely not make a big difference overall. The primary thing to consider is how much faster you’ll be able to get your balances down to zero on your credit report, which is critical to increasing your credit score.
Suppose you can reach an agreement with your creditors. In that case, sometimes, the IRS will consider the forgiven debt to be taxable income. If this applies to your situation, you may have to pay taxes on the debt reduction amount if you receive an IRS 1099-C cancelation of debt form from the creditor.
While a debt settlement company shouldn’t charge you an up-front fee for their financial debt help, if they settle your debts using their negotiators and settlement program, the company may ask you to pay a fee for settling your debts.
That said, debt settlement and debt relief companies shouldn’t charge a fee until they’ve successfully reached a settlement agreement that you approve.
Although it is possible to settle your debts on your own for free, getting the help of a debt settlement expert could be well worth their modest fee.
Contact Alleviate Financial today and start settling your debt.