If you’re in need of serious debt relief, you might be considering a debt settlement. This is one strategy that helps you get out of debt quickly — and potentially pay less than the total debt owed. So how does it work? And is debt settlement worth it? Here’s what you should know.
Is Debt Settlement Worth It?
When you’re a borrower struggling with debt, it’s important to act quickly and find a solution. The longer you go missing payments and racking up interest on your outstanding debt, the harder it will be to recover. But is debt settlement the right choice for you when you are struggling with your debt?
How Debt Settlement Works
A debt settlement attorney works with people who are struggling to pay back their debt. They often help clients settle with creditors and pay back much less than the total amount owed.
When a debt is settled, it means the original creditor or debt collector has agreed to accept less than the full balance as payment. Creditors usually agree to this type of deal when it’s clear they won’t be able to collect the full amount from you, or you have made a convincing argument for the creditor to take less than what is owed. Typically, you need to be behind — or “delinquent” — on payments for this to happen.
For example, you may have missed many payments in a row or your account has been sent to collections. In these situations, the creditor may be willing to accept a settlement versus nothing at all. That could be in the form of a lump sum payment or installments.
Debt settlement works for various types of debt. For example, you may be able to settle unsecured debt. This includes credit card debt, medical bills, and private student loans. Sometimes, it’s also possible to settle secured debt, which is any type of debt that is backed by collateral. Mortgages and auto loans are examples of secured debt. If you fail to pay back the loan, the lender can seize your collateral to satisfy the debt. Other assets that can be used to secure a loan include ATVs, motorhomes, real estate, bank accounts, investments, etc.
Pros and Cons of Debt Settlement
When determining whether the debt settlement process is worth it, it’s important to consider the major pros and cons first.
Pay less than you owe. One of the biggest benefits of debt settlement is that you will end up paying back less than you originally owed. In some cases, you could end up paying a lot less. It depends on the amount of debt you owe, who you owe, who is negotiating on your behalf, and more.
Get rid of debt quickly. A successful debt settlement also helps you knock out your debt much faster than if you were to go through the process of a debt management plan or bankruptcy. You’ll put an end to the calls from collection agencies that much sooner. Plus, you can start getting back on your feet financially once the settlement amount is paid and begin the credit repair process naturally.
Avoid bankruptcy. Bankruptcy is one way to get a fresh start when you’re facing a lot of debt, but it can have major consequences for your finances. If you would prefer to avoid filing for bankruptcy, or you cannot file because you don’t qualify, debt settlement is a solid alternative.
Avoid getting sued. If your debt continues to go unpaid, the creditor or debt collector may decide to take you to court. Being sued for unpaid debt is an expensive and time-consuming situation that can leave you in a much worse place. By settling, you can prevent or stop this legal process from happening.
Effectibe for certain types of debt. Secured debts, such as mortgages and auto loans, aren’t usually eligible for debt settlement because the lender can repossess the collateral to satisfy the debt. Usually, it’s unsecured debts (credit cards, personal loans, etc.) can be settled.
Creditors may not agree. Your creditors are under no obligation to agree to a settlement. There’s a chance debt settlement won’t work and you’ll have to explore other alternatives. That’s why it’s important to work with a skilled debt settlement attorney to increase your chances of a favorable outcome.
Negative impact on credit. Settling a debt can have negative consequences for your credit. For one, you need to be behind on your payments to get a debt settlement, which will cause a major drop in your credit score. Settled debt is also often reported to the credit bureaus as a partial payment, which can harm your score. And it remains on your reports for seven years. Still, temporary consequences are often better than continuing to miss payments, which could result in a lawsuit. Working with the right firm could help you avoid and manage the consequences of credit impact.
Potential tax consequences. When a portion of your debt is canceled, the IRS often considers it taxable income. So if you settle your debt, you may need to pay taxes for the full forgiven amount that year. Be sure to find out how debt settlement impacts you and your finances (it may not impact your taxes at all).
Scams. The Federal Trade Commission (FTC) warns that not all debt settlement companies are legitimate. Some will charge excessive, upfront fees and make promises that they can’t keep. Be wary of fraudulent debt settlement agencies and work with a trusted professional who focuses on specifically debt resolution and debt relief.
Alternatives to Debt Settlement
Debt settlement isn’t your only choice for handling unmanageable debt. You may also want to explore these alternative debt relief options.
Debt Management Plan
A debt management plan (DMP) is a type of revised payment plan you can work out with the help of a nonprofit credit counseling agency. With a DMP, you make a single monthly payment to the credit counselor, which then divvies up the funds to your individual creditors. These plans typically take three to five years to complete. They’re best for people who aren’t too behind on payments. It’s also important to ensure you can afford the monthly payments required by the credit counseling agency.
Debt Consolidation Loan
With debt consolidation, you take out a personal loan with a lower interest rate and use the funds to pay off higher-interest debts. That way, you have one single monthly payment to manage, and end up paying less interest over time. However, in order to qualify for a loan like this, you need to have good credit. That might not be possible if you’ve already missed several payments.
Bankruptcy is usually considered a last resort, though it can be beneficial. With a Chapter 7 bankruptcy, you sell off your assets to pay off creditors and the remaining debt gets wiped away. This type of bankruptcy is often completed within a year. If you have a steady income, a Chapter 13 bankruptcy lets you keep most of your assets and puts you on a three- to five-year repayment plan instead.
The downside to either type of bankruptcy is that your credit score will be significantly impacted. Plus, it will stay on your credit report for seven to 10 years. You also have to qualify for bankruptcy.
Get Legal Help for Your Debt
Whether or not a debt settlement program is worth it depends on your financial situation. In many cases, it can help you get out from under the burden of debt quickly, and for less than you originally owed. In other situations, it may be better to pursue alternatives, such as bankruptcy. You don’t have to make these kinds of decisions on your own. Tayne Law Group has been helping clients resolve their debts for more than 20 years. We offer a free, no-obligation phone consultation so you can talk one-on-one with one of our experienced staff members to learn your options. And you don’t have to worry about paying a dime unless you decide to hire our services. Call our offices at (866) 890-7337 or fill out our short contact form for a free consultation. We never share or sell your information.