The Pros and Cons of Settling Debt Yourself

There are many important things to think about if you are considering debt settlement. The following are some of the most important effects that debt settlement can have on you and your family.

The Pros

• Bankruptcy avoidance – Settling debt is a good alternative to bankruptcy when the debtor has enough money to pay for their essential living expenses and secured debts such as a mortgage or car payments.
• Credit score recovers quicker than with bankruptcy – While filing bankruptcy can leave a debtor without any credit at all for seven years or more, the debt settlement process only affects the credit score until the debt(s) has been settled, at which time the debtor can start building their score back up again. It will take some time for your credit to get back to where it once was, but in most cases it takes far less time than with bankruptcy.

The Cons - Far more of these.

• Credit score affected – Debt settlement not only affects your credit score because you have settled your accounts for a lower amount, but also because of the amount of time that accounts were in default before a settlement occured. Your score would be affected the same way if you decided not to pay your monthly minimum payments and did not settle your debt. Again, you should not default on your payments if you are able to afford them. Debt settlement should only be used to avoid bankruptcy if possible.

• Late fees, penalties, and interest rate accrual – If you’ve ever been late on a credit card payment, you’ve probably seen how banks are more than happy to charge you a fee for being late. The same thing happens when you are in default and pursuing a debt settlement route. Beyond that, banks will often increase the interest rate of the account when payments are not made.

• Settlements may be taxable – When a debt is settled, the amount that is saved by the consumer may be taxed as income by the IRS or other agencies. Often times, creditors will report any savings over $600 to the IRS directly after the settlement has been made. For example, if you have a $1,500 debt that you manage to settle for 33% (or $500), the difference of $1,000 would be reported to the IRS as income, just like earnings from a paycheck are reported and you would have to pay taxes on that $1,000.

• Collection calls galore – If you decide to settle your debt, expect to be called by your creditors and collection agencies – constantly. The creditors have the right to call you to try to collect the debt. On the other hand, creditors DO NOT have the right to harass you. You are entitled to certain rights as a consumer under multiple Federal Trade Commission (FTC) guidelines and acts. For more information about your rights in regards to debt collection, visit the FTC’s Debt Collection FAQs: A Guide for Consumers.

• Possibility of being sued – When you sign an agreement to have a credit card or other type of unsecured loan, you are making a contract with your creditor. If you do not fulfill your end of the contract, your creditor has the right to sue you. It doesn’t always happen, but it is always a possible. If you are sued, you should respond as the directions on the summons or court document instructs. It may also be wise to speak with a lawyer who specializes in civil cases like this.

There are more positive and negative affects of debt settlement that are not included in this article. These are just some of the more major of the affects. You should consult a professional credit counseling service for more information on how debt settlement might affect you, your credit score, and your life.