November 3, 2009
Pros and Cons of Debt Settlement
Paying off your debts can only be a good thing. Being able to settle your accounts in full will give you a peace of mind and much needed financial security. Or so it is for most of us. Debt settlement is where the debtor and the creditor come into agreement in which the debtor pays off part or the entire amount owed in a single payment. It has now become one of the most popular ways of paying off debts. However, debt settlement does have its flip side. Here are a few pros and cons of debt settlement.
Pros
One, the debtor gets to pay back an amount far less than what he actually owns. How much less will be determined by the quality of negotiations between the debtor and the creditor. In most cases debtors stand to save about 35% to 60% of the total amount owed.
Two, debt settlement is a relatively simple process if one is able to understand how it works. This means that as the debtor, you do not have to hire the services of a lawyer or attorney to negotiate a good debt settlement. You could do so on your own.
Three, it is possible for the debtor to negotiate from paying the interest owed as well. If he handles the negotiation well and knows his stuff, he could end up not paying interest on the whole amount owed.
It is also impossible to ignore the peace of mind that comes with the knowledge that your debt is no more. Having no more calls from the creditor can only be very relieving.
Cons
The credit score of the debtor suffers significantly if they opt for debt settlement. Any means of evading debt is normally considered negatively as far as credit rating is concerned.
The debtor will have to pay tax on any savings made by debt settlement. According to the law in the US, any debt forgiven in excess of USD 600 is subject to tax.
Debt settlement is only an option for those in financial dire straits or those who are way behind in debt payment. Anybody who is financially stable does not qualify for debt settlement.
Creditors are naturally not very enthusiastic about debt settlement. As a result, not many of them will have debt settlement as an option when lending you the money. That makes it possible for them to treat you a little more coldly if you attempt to negotiate a debt settlement agreement.
Also, once the creditor acknowledges in your credit report that you paid of your debt by settlement you will have serious problems getting a loan in future. This is because your credit score will have taken a good beating.