Is Debt Settlement Necessarily a Bad Thing?

When debt strikes, settling your debt through a debt settlement company is one option to explore to handle this problem. Debt settlement has both advantages and disadvantages; you may find using this solution more beneficial than others. Whether debt settlement is good for you depends on your situation.

Convenience

In debt settlement, you pay a company a fee to negotiate with your creditors. Ideally, the negotiations result in the creditors writing off some or all of your debt; the fee charged for the negotiation services is less than the writeoff amount. This is extremely convenient in that your debt gets slashed without you doing any work. To top it off, you can ask creditors to talk to the debt settlement company instead of you so any harassment stops. However, you're paying the company to do something you could do yourself.

Impact on Credit

Future creditors may see debt settlement on your credit history in a positive light. They assume that settling a debt is better than going through bankruptcy, which is more restrictive. Most of the time, however, debt settlement hurts your credit. Creditors with whom you settle tell the credit bureaus you haven't paid your debt as agreed. Other creditors see this as a warning about how you may handle new agreements.

The Tax Issue

When you go through debt settlement, you can drastically alter what you owe. However, you still have to pay taxes on whatever amount the creditor forgives. The better your settlement, the more taxes you pay.

Debt Amount

Debt settlement companies don't work for free. If you owe a substantial sum, then the fees charged may be less than your savings. If your debt is minimal, such as just one or two payments, paying fees actually may cost you more than what the negotiation puts back in your pocket.

The Final Call

Debt settlement is better for those who have stable, good credit, as well as for those who owe large amounts. It may be beneficial if your debt is overwhelming you, although financial advisers can show you how to tackle debt with less stress. Don't use a settlement company if you've already tried to settle on your own and been denied, as debt companies usually offer less to a creditor than you would. If your credit score already has dings, debt consolidation isn't the best choice because it puts your ability to get future credit at risk.