Debt is an issue that many people face and a number of options exist for dealing with it. One option that many choose is debt settlement. Settling debts can provide you with a way to save money, but this option is not for everyone. Before settling your debt, a few factors must be considered.
Debt Settlement Basics
The basic idea behind debt settlement is that you agree to pay a creditor a lump sum of money. The creditor then agrees to close out your account for less than what you actually owed. Debt settlement can be pursued on an individual basis or you can do it with the assistance of an attorney. Once you settle you make your payment to the creditor, it closes out your account and reports it to the credit bureaus as "settled" in most cases.
Future Credit
Before you settle a debt, you need to think about the potential credit consequences of doing so. If you are thinking about taking out a mortgage, getting a car loan or taking out some other credit in the near future, you may want to avoid debt settlement. Debt settlement can be very damaging to your credit report and you may not be able to get a loan immediately after going through the process. It will lower your credit score and you may not qualify for the financing you need. If you have no need for credit in the future, you may want to settle.
Saving Money
Even though debt settlement can be very damaging to your credit report, it can also save you some money. If you have a lump sum of money, but you do not have the total amount that you owe a creditor, debt settlement can be an attractive option. In some cases, your creditor may be willing to settle for half of what you owe. For instance, if you owed $8,000 on a credit card and you have not made your payment in several months, your creditor might take $4,000 to close out your account.
Avoiding Bankruptcy
When you want to avoid bankruptcy, debt settlement might be a better option to pursue. Bankruptcy can be extremely disruptive to your credit profile and it will remain on your credit report for 10 years. If you had hopes of being able to rebuild your credit and get financing again at some point in the future, debt settlement can be a less damaging option to pursue. If you settle several debts separately, the damage you do to your credit could be close to what bankruptcy causes. If you only have one or two large debts, settlement might be the better option.
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