If you feel like you’re drowning in debt, then debt settlement may seem like an appealing option. Debt settlement involves working with your creditors to settle your debt for less than you owe. Creditors are often willing to settle because debt collection agencies will purchase the debt for less than the balance anyway. And if you declare bankruptcy, they might not get anything.
But what’s in it for you? And what are the drawbacks?
How Debt Settlement Can Help
Debt settlement relieves you of your debt without having to declare bankruptcy. It’s a one-and-done deal and you have a clean slate. That’s the major benefit.
You also won’t have to worry about collectors harassing you.
But It’s Not a Magic Bullet…
Chances are creditors will only settle with you if you’re behind on payments by six months or more. That means your credit is going to take a hit. And while bankruptcy is certainly much worse on a credit report, a settlement is not seen as a positive either.
You’ll also have to pay taxes on the debt that is forgiven. For example: let’s say you negotiate your $20,000 debt down to $8,000. You’ll owe taxes on the $12,000 that was forgiven.
And you’ll also need to pay the negotiated settlement in full. Using the above example, you’d have to pay the $8,000 in one lump sum at the time of settlement.
Should I Use a Debt Settlement Company?
It’s not in your best interest to use a debt settlement company. These companies have loose regulations and are ultimately doing the same thing you can do yourself: negotiating with your creditors.
You’ll also be paying for the service, which will take away from what you’re saving with the process.
Instead, look for non-profit debt counseling services. This website is a great resource. You can also talk to your credit union!
A Better Alternative: Debt Consolidation
If you’re not on the brink of bankruptcy, you can get a better handle on your debt by consolidating. This involves rolling all your debt into one manageable payment. There are several options for this:
- If you have primarily credit card debt, you can transfer balances to a lower rate card and take advantage of promotional offers, like 0% APR for the first six months.
- Take out a personal loan to have a set time frame and monthly payment.
- For a lower rate, consider a Home Equity Loan.
You can talk to your credit union to figure out the best solution for you.