The decision to settle an account with a creditor depends largely on your present financial circumstances. A debt settlement can save you money and possibly stop harassing creditor calls. But there's a down side to debt settlements, and it's best to consider the advantages and disadvantages before making a decision.
What Is a Debt Settlement?
Debt settlement with a creditor is a way to satisfy a debt for less than what you owe. For example, if you have a credit card with a $10,000 outstanding balance, you can possibly contact your creditor an negotiate a debt settlement for a percentage of the balance -- 25 to 70 percent on the dollar. You can offer $5,000 to settle and satisfy the debt, and the creditor can either accept or reject your offer. By accepting, creditors agree to take the cash and stop collection attempts.
Lump Sum Payments
Your available cash can have an impact on the decision to settle with a creditor. Creditors who accept debt settlement offers may not accept installment payments. Instead, they may require one lump sum payment to satisfy the debt. You can discuss payment options with creditors to see if they will permit monthly installments. Still, be prepared to send a lump sum payment for the full settlement amount.
Payment Record
A debt settlement can provide a fast and simple way to eradicate a debt. However, some creditors will not consider a debt settlement if you're current with the account. Creditors want to recover funds, and they usually charge-off or send an account to collections after 180 days of nonpayment. Being past due on an account works to your advantage because creditors become desperate, and they would rather settle than lose the chance of recovering funds.
Credit History
Being behind on payments will lower your credit score, and negotiating a debt settlement can also do credit damage depending on how the creditor reports the payoff. Your creditor will likely report "account settled for less than balance owed," and this can have a negative effect on your personal score. However, a debt settlement is less damaging than a bankruptcy, which eliminates debts and remains on your credit report for 10 years. If contemplating bankruptcy to deal with debts, settling your account with creditors can help relieve debt burdens and possibly avert a bankruptcy filing.
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