Description: Know both the positive and negative aspects of a debt settlement program before making a decision.

What are the pros and cons of a debt settlement program?

Too much debt can cause you to have nightmares. Many people resort to a debt settlement program to solve their debt problems. However, you should check out the advantages and disadvantages of a debt settlement program prior to signing up for one. It’s always essential to evaluate the pros and cons of an option prior to making any decision associated with your finances.

Advantages of debt settlement

Let’s start with the benefits of debt settlement:

1) Debt reduction

If you choose a debt settlement program to alleviate your debt burden, you can lower the balances owed to your creditors by up to 70%. A settlement company would negotiate with your creditors and set up a repayment plan that is within your means.

2) Simple repayment facilities

You can pay off the settlement amount through easy installments or as a lump sum payment. Settlement companies can offer installment payment facilities for up to two years. Moreover, they help you save money. Take into consideration your overall outstanding balance that you owe to your unsecured lenders. Work out 30% of this balance and distribute it over a period of two years. You would obviously be left with plenty of money once the settlement program is complete.

3) Elimination of fees

A debt settlement company would help you get rid of the interest, late fees and over limit fees once you enroll for their program. This helps make your debt repayment simpler and affordable.

4) Least formalities

Debt settlement is not like debt consolidation. There are minimum formalities necessary in settlement. You just need a letter from your lender and that’s all.

5) Stop creditor harassment

Once you enroll into a settlement program, you can stop disturbing collection calls from your creditors and drive away your anxieties.

Disadvantages of debt settlement

Now let’s look at the downsides of settling your debts:

1) Your credit score takes a hit

Your credit score would be spoiled since your creditors would report to the credit bureaus that you’ve settled your debts rather than paying them off in total. Though this is not as detrimental as bankruptcy, it definitely is harmful to you if you have a good credit score.

2) Amount waived off is taxable

When a part of your debts is wiped out by your creditors, it is demonstrated as an income and you need to pay taxes for it.

3) You need to save money

Once you sign up for a settlement program, you must try to save sufficient money over a particular time period so that the settlement offer is finalized with your creditors. If an installment payment plan is set up, you need to follow it sincerely. Failing to make your payments would invalidate the settlement plan.

4) Not useful if the balance is low

You shouldn’t go for debt settlement if you have low outstanding balances since it wouldn’t be cost effective. The monthly fees and upfront fees would negate its benefits. Try to pay off your balances on your own.

Before making a decision, assess your debt condition properly and seek financial advices from experts. After all, it’s your hard-earned money.