When you have more debt than you know how to pay back, it can be incredibly anxiety-inducing. Monthly debt payments might be taking over your monthly budget making it impossible to afford your other financial obligations. You are not alone; so many Americans have found themselves in crippling debt that they can’t afford. Fortunately, there are options for debt relief out there and financial freedom may be in reach.
A common solution for debt relief is a debt settlement program. This solution is only one of many debt relief options. Some borrowers turn to debt consolidation, debt management plans, and even filing bankruptcy. Which option for debt relief works best for you depends entirely on your unique financial situation.
What Is Debt Settlement?
Debt settlement works as a negotiation tactic to settle various debts for less than the actual amount owed. This can be done with the help of a debt settlement company or on your own negotiating with your creditors individually.
The option of debt settlement is not available to everyone as most debt settlements are handled in a lump sum payment. If you don’t have enough money to pay the full settled balance up front, debt settlement may not be possible for you.
The amount you can negotiate for a lump sum debt settlement depends on how much you owe and how far behind you are in debt payments. A creditor might be more willing to negotiate a settlement for your unsecured debts if you are behind on monthly payments and considering the possibility of bankruptcy. For lenders, settling for less money is better than the debt being discharged completely.
DIY Debt Settlement vs. Paying a Debt Settlement Company
While having a debt settlement company handle the all the negotiating on your behalf sounds convenient, there are dangers to beware of in the debt settlement industry. Many debt settlement programs have turned out to be scammers who prey on borrowers is distress, charging ridiculous fees and committing fraud. The Federal Trade Commission (FTC) has caught a lot of these scammers and taken legal action against them, but there are still plenty of them out there.
If you come across any debt settlement companies that ask for money upfront, do not work with them and report them to the FTC immediately. Working with a debt settlement company that is reputable and highly recommended may still be helpful if you don’t wish to work with creditors on your own. However, it is important to note that many credit card companies refuse to work with debt settlement companies altogether. Before making any decisions, it is a good idea to talk to your creditors policies.
Pros of Debt Settlement
Debt settlement can end up being an excellent solution for people looking to save money on their unsecured debts. Debt settlement is available for common types of consumer debt like medical bills and credit card debt but not for secured debt.
The debt settlement process might not fit for all borrowers as it typically requires the debt to be paid in one lump sum once the settlement offer is accepted. So the borrower must have the cash available to pay off the debt outright. However, for those who can seek debt settlement, there are several great benefits.
Relief From Overwhelming Debt
Settling your debt can bring you an enormous amount of relief. Debt payments can take over your budget and your peace of mind. The anxiety that comes from having more debt than you can afford cannot be overstated especially when you feel caught in an endless debt cycle with high-interest products like payday loans. Once you are debt-free, you are sure to feel ten times lighter.
Faster Debt Repayment
Settling debt can be a far quicker solution to having too much debt compared to filing for bankruptcy or a debt management plan. This is why it’s important to understand the distinction between debt management vs debt settlement. Having your debt settled for a lower cost than the balance owed not only saves you money but also a significant amount of time.
While debt settlement will still have an impact on your credit report, it will not negatively impact it as much as filing for bankruptcy. Bankruptcy can stay on your credit report for seven to ten years which can make it challenging to obtain new credit or get approved for that apartment you want to move into. Debt settlement can enable you to avoid bankruptcy and still get partially forgiven debt.
Cons of Debt Settlement
There are some cons of debt settlement that would be wise to familiarize yourself with before going forward with a decision. Even though it can be an excellent solution for many, debt settlement is not for everyone. Here are some of the drawbacks of debt settlement:
Creditors May Not Agree To Settle
As we mentioned earlier, not all creditors are willing to work with a debt settlement service. In addition to that, there are creditors who may be unwilling to settle an outstanding balance at all. It’s important to keep in mind that not all lenders or credit card companies will be amenable to settlement so discuss their policies before setting your sights on this solution.
Late Fees Might Increase Balance
Through the process of negotiation, you could continue to wrack up your balance through interest charges and fees. Every monthly payment you miss while negotiating for settlement will result in late fees which can add up over time. Watching your balance rise slowly over time through the negotiation process can be stressful.
The money you save in debt settlement is referred to as canceled debt and is considered taxable income. The IRS keeps a record of settled or canceled debts so it’s necessary for you to declare any savings over $600 as income when you file your tax return. You will need to account for the money you saved in your taxable income so you don’t come up short at the next tax day.
Hurt Your Credit Score
Debt settlement changes your credit utilization ratio overnight which can make a major impact on your credit score. The debt amount you owe will decrease but your available credit will decrease alongside it as your accounts are closed. This could possibly lead to a major drop in your credit score.
Alternatives to Debt Settlement
If debt settlement is not the right fit for your financial situation, there are alternatives you can look into for managing debt. We recommend always comparing and contrasting your options so that when you finally land on a debt management solution, you can be positive it was the right choice to make amidst all the other options out there.
Seek Credit Counseling
Finding a certified credit counselor to help you work through your options can be helpful when you aren’t sure what to do. Many credit counselors work at nonprofit credit counseling agencies which commonly offer the first visit for free. A credit counselor could provide you with insight that you might not have received elsewhere and keep you up to date on all the best debt relief programs and debt management plans available.
Debt consolidation could help you minimize your many monthly payments into one monthly payment with a better interest rate. You can obtain a debt consolidation loan or use a balance transfer credit card to consolidate your debt. Additionally, many borrowers have used personal loans for debt consolidation.
However you consolidate your debt, you could get lower interest rates by transferring your credit card debt onto one card or loan to save yourself money and the headache of keeping track of various debts. You won’t be able to pay less in total like you do with debt settlement but consolidation can make debt repayment a whole lot easier. Plus, it has the benefit of not harming your credit score as much as debt settlement would.
Filing for Bankruptcy
If you are unable to afford your multiple debts or cover a lump sum in settlement, it might be time to consider bankruptcy as an option. Filing for bankruptcy should always be a last resort solution because of the long-lasting effects on your credit. However, sometimes filing bankruptcy is the best solution when your unsecured debt gets out of control and you are out of other options.
While bankruptcy can be challenging to recover from, with resources for a proper financial education and credit counseling you will be able to get back on your feet again. Whether you choose debt settlement, bankruptcy, consolidation, or some other form of debt management, the most important thing is that you do your research and think carefully about which option fits best for your unique financial situation. If you do that, you should be in a good position.