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Pros and Cons of Debt Settlement
If you're overwhelmed with unsecured debts, one solution always worth exploring is something called debt settlement; but it's not the only solution. Depending on your financial situation, there are several approaches you can take: paying off a debt without any outside help (by paying more than the monthly minimum payment), consumer credit counseling, and bankruptcy.
But there are costs and benefits associated with each of these methods of debt reduction, and none is perfect. This article will explore the method of debt settlement.
Benefits of Debt Settlement
Debt settlement allows you to pay off your debts at a reduced premium, typically between 30 and 70 cents on the dollar. In this type of program, no more interest is paid. Instead, a reduction in principal is negotiated, providing you a tremendous savings. This, in turn, allows you to settle the debts in an accelerated time frame, usually somewhere between six and thirty-six months. It's sort of a bankruptcy alternative for those with substantial uncollateralized debts totaling at least $10,000. These programs offer the most savings and the shortest duration, aside from filing bankruptcy. Naturally, settling your debts will negatively affect your credit, however, there is a positive side to this, as well. Your debt-to-income ratio, one of a few key factors in determining your credit score, will improve. Assuming a fixed income, eliminating thousands of dollars worth of debt will help to raise your credit score.
Disadvantages of Debt Settlement
A settlement can negatively impact your credit score. If you enter a debt settlement program when you're current on your payments, delinquencies will begin to appear on your credit report: 30 days late, 60 days late, 90 days late, and so on, until sufficient funds have accrued and a settlement offer is accepted. Once the debt is settled, it does not appear on your credit report as being "paid off." Rather, different terminologies are used: "Settled" or "Settled in full for less than the full amount." This will negatively impact your credit score.
Another area of potential concern is the fees charged by some companies. Many debt-settlement companies charge large fees, sometimes totaling 30 percent or more of the savings they've achieved for you, their clients. Furthermore, depending on the company, most of these fees are charged up-front. Debt settlement can also be a taxable event: the amount of debt forgiven considered as income. (Please note that even with the associated fees and taxes, a substantial savings is usually achieved when compared to continuing to pay the monthly minimum payment). Finally, this is America, and anyone can sue anyone else for any reason. Creditors can and sometimes do sue debtors for non-payment, and this can happen even when one is enrolled in a debt settlement program.
To learn more, call to find out if debt settlement is right for you.