by There are many debt relief programs available to people struggling with credit card and other unsecured debt. Some are legitimate, while others may be misleading or even scams. It’s important to understand the major pros and cons of any debt settlement program before enrolling.
Debt settlement promises a quick solution to debt problems, and in some cases, it can do just that. It’s a popular option for those with severe financial hardship, as it typically reduces debt balances by a significant amount and can get you out of debt much faster than traditional payments or a debt management plan. It can also simplify repayment, as you’ll be making a single monthly payment to your debt settlement agency instead of your multiple creditors.
But debt settlement isn’t right for everyone, and it can have serious negative consequences if not done correctly. Many of these issues are exacerbated by unscrupulous debt settlement companies that make outrageous claims and charge exorbitant fees for their services.
It’s also important to recognize that while a debt settlement program can save you money, it can have a long-term negative impact on your credit report and score. A typical debt settlement program requires you to stop paying your creditors in order to allow the company to negotiate with them on your behalf. This can result in months or years of missed payments, which will damage your credit score significantly if not already damaged by prior late payments.
Additionally, the debt settlement process itself can have significant tax implications for you. When a creditor agrees to settle your debt for less than you owe, the IRS considers that reduction in debt as taxable income. If you’re not careful, the reduced debt balance could add up to a hefty tax bill.
The last big concern to keep in mind is that while you’re stopping your payments to fund an escrow account large enough to make an attention-grabbing offer to creditors, your debt will continue to grow through interest and late fees. Often, borrowers aren’t able to fund the escrow account long enough to settle their debts and end up dropping out of the program, allowing their balances to grow into alarming totals.
Ultimately, the success of any debt settlement depends on how much you owe and what kind of debt it is. Most unsecured consumer debt, like credit card and medical bills, is eligible for settlement. However, secured debts, like mortgages and auto loans, aren’t eligible for settlement and will need to be addressed through other options.
Before you decide to work with a debt settlement program, thoroughly research providers and ensure they have a good track record of success. Read reviews and testimonials, and look into a provider’s Better Business Bureau rating and any consumer complaints that might have been filed. It’s also a good idea to talk with friends and family who have used debt settlement companies for their recommendations. Also, search the CFPB’s consumer complaint database and your state Attorney General’s website to find out whether any debt settlement companies in your area are licensed to do business there.