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The pros and cons of debt settlement

If you are behind on your bills, you likely have moments of desperation. These moments may have led you to do ill-advised things, like selling a family heirloom or taking out a payday loan. On one of the many nights you could not fall asleep because your debt burden weighed on you, you may have sat up all night searching the internet for a solution to your financial problems.

One option you may have come across is debt settlement. If you saw an ad for a debt settlement company that promised to drastically reduce your debt so that you will be free of debt within a few short years, you may think you have found the answer to your problems. However, it is important that you fully understand how debt settlement works and the potential risks you face.

Is debt settlement the best alternative for you?

If you sign on with a debt settlement company, the first instruction you will receive is to stop paying your creditors. This may seem strange to you if you have been agonizing over missing payments. Nevertheless, instead of paying your creditors, you will send payments to the settlement company, who holds it in an account until you have accumulated a certain amount. Then the settlement company uses that amount to negotiate with your creditors for a lower payoff to settle the balance you owe.

This sounds ideal for many reasons. Having your debt settled, paying less than you owe and having someone else do the negotiating for you all make it seem like a perfect plan. However, these are the drawbacks:

  • During the time you stop paying your monthly bills, fees and late charges accumulate.
  • When your accounts fall into delinquency, your credit rating drops, and you can't begin to rebuild it until the settlement process is over.
  • The fee for debt settlement can be as high as 25 percent of the amount of debt your creditors forgive.
  • You may also pay taxes on the amount of debt your creditors discharge.
  • Many creditors refuse to work with debt settlement companies, which means you will have allowed your debt to fall into serious delinquency and still not resolved the problem.

Some financial advocates discourage people from seeking debt settlement as a way to deal with their money problems. There are other alternatives that may offer a lower risk, such as debt management and credit counseling. However, filing for bankruptcy not only allows you to eliminate many of your debts if you qualify, but it also puts an immediate stop to creditor harassment, wage garnishment and foreclosure proceedings. Seeking advice from an experienced Florida attorney may provide you with guidance for the best option for your circumstances.

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