Debt settlement can help you pay off large amounts of debt. It requires making a lump-sum payment to a debt settlement company, or depositing money each month into an escrow account until there’s enough for it to negotiate with the creditor. This often means paying less than your outstanding balance. While this strategy can work depending on your situation, it’s important to weigh the pro’s and con’s of debt settlement before moving forward.
Pro’s of Debt Settlement
A debt settlement company negotiates with your creditors on your behalf. Beware of creditors that claim they’ll accept just a percentage of what you owe. But when you work with a legitimate company, here are some benefits you can see:
- Reduce the Amount Owed: If the creditor accepts the agreement, you could settle your debt for less than the total amount overdue. In fact, most consumers settle for around 50% of what they owe. With fees, this comes to about 30%. Depending on the creditor, interest charges and fees may be waived.
- Pay Off Your Debts Faster: Consumers in a legitimate debt settlement program can often pay off their debt in two to four years. Settling debt is often a faster process than other options, such as credit counseling or a debt management plan. By only making small monthly payments, it may take decades to pay off debt.
- No Collections or Charge Offs: When you enter into a debt settlement program, you will also avoid being “charged off”. This is when your debt is sold to a debt collection agency. Therefore, you won’t deal with harassing calls or consequences such as wage garnishments.
- Avoid Lawsuits: In some situations, you could be sued for defaulting on credit card debt. But creditors would usually rather negotiate a settlement than engage in an expensive lawsuit. If you can’t make your minimum monthly payments, debt settlement may be the best solution.
- Avoid Bankruptcy: Perhaps one of the most significant pro’s and con’s of debt settlement is it’s a better alternative to filing for bankruptcy. After all, the creditor may receive less or nothing at all if you go that route. A debt settlement program can get you out of debt in three years, while bankruptcy stays on your credit report for up to 10 years.
Con’s of Debt Settlement
Debt settlement can save money, but there are often strings attached. It’s important to consider these risks as, depending on your situation, can outweigh the benefits:
- High Fees: Debt settlement companies often charge a fee equal to a portion of the final settlement amount. It can range from hundreds to thousands of dollars. When you pay the company’s fee, it goes into their coffers and not towards paying your debt. This applies even if your entire debt isn’t settled.
- Negative Impact on Your Credit Score: If you negotiate a debt settlement directly with your creditors, it may be reported to the credit bureaus. Also, debt settlement companies often encourage debtors to stop making payments, so their accounts become delinquent; this not only affects your credit score, but the creditor may send your account to collections.
- Not Always Able to Settle Debts for Less: Creditors aren’t obligated to agree to a settlement and may refuse to negotiate with a debt settlement company. You also lose out if you paid the company upfront before reaching a deal.
- Forgiven Debt May Be Taxable: A creditor must contact the IRS if a debt is reduced by $600 or more. The reduced amount is considered taxable income. One way to get around this is to claim insolvency, meaning your total liabilities exceed your assets.
- Funds May Be Withheld: You pay a lump sum to a debt settlement provider and it holds this amount in escrow. The holding can last for months or years. During this time, the company may tell you it needs more time to negotiate with your creditors. Even if little progress is made, the provider may refuse to refund you the money.
- You Can End Up with More Debt: Once you stop paying creditors, they may still charge late fees and interest. Those, in addition to potential tax obligations and other financial impacts, can leave you more in debt than before.
Contact OakTree Law
If you’re facing overwhelming amounts of debt, bankruptcy, or collections actions such as wage garnishments, OakTree Law can find a solution that works for you. Our team specializes in bankruptcy law, loan modification, and legal options to avoid foreclosure and can help you weigh the pro’s and con’s of debt settlement. We’ve been serving clients in and around Los Angeles since 2009. To get started, request your free evaluation online or call 888-348-2609.