Debt settlement refers to the payment of a debt for less than its face value. If you owe a creditor a total of $5,000, and you negotiate a settlement to pay back “20 cents on the dollar,” or $1,000 altogether, this is an example of debt settlement. Many debtors suppose that debt settlement represents the ideal outcome in nearly every situation; in other words, they assume that settlement is always the best path forward. However, as we will show in this post, settlement actually comes with some drawbacks. At the same time, there is no question that settlement can have positive consequences as well. In this post, we will give a basic breakdown of the pros and cons of this strategy.

Pros

  There can be no denying that settling a debt for less than its full face value can be a very beneficial thing. In addition to paying less than the full amount owed, debt settlement provides a means for a person to be completely finished with a debt at a single point in time. After paying the settlement, there is no more worrying about the debt at all. After you pay, you can take a sigh of relief knowing that the matter is totally resolved. What’s more, after debt settlement, you won’t have to worry about receiving calls from collection agencies or calls directly from the creditor. This can be a major benefit. Calls from collectors or creditors can be a huge source of stress and potential embarrassment; settlement takes care of this issue once and for all. Because settlement allows resolution for less than the face value of the debt, those who opt for this route will have an improved ability to take care of other debts and rebuild their overall financial condition. If, prior to settlement, a person were unable to rebuild his or her financial condition because of reduced availability of capital, this situation would be greatly assisted with settlement.

Cons

  Although no one can take away the many pros, readers also need to learn about the drawbacks of debt settlement. For one thing, debt settlement doesn’t always come about without any additional fees. If you hire a third-party company to assist you with the settlement negotiation process, that outside company will typically charge a fee in the range of 20% to 30% of the settlement amount. Depending on the size of the debt, this means you could incur a very substantial fee for the settlement. In addition, another possible drawback is a damaged credit score. When you settle a debt, certain credit rating agencies view this as a negative financial event, and consequently a settlement will result in a decreased score. Another drawback is the potential tax liability which can result from debt cancellation. If a creditor agrees to settle, that creditor is essentially agreeing to cancel a portion of the debt, and debt cancellation is typically treated as a form of taxable income. For instance, if your creditor forgives $4,000 of debt, this will be treated as a gain of $4,000, and so the debtor will need to pay taxes on this gain. If the debtor doesn’t have a means to reduce or eliminate this tax burden, he or she can end up with an unfortunate tax bill at the end of the year. This is something which definitely needs to be kept in mind when contemplating debt settlement as an option.

Contact Financial Freedom Advocates for More Information

Hopefully this gives readers a better understanding of the pros and cons involved in debt settlement. If you’d like to learn more, please contact Financial Freedom Advocates today by calling 786-668-6688.