If you are in debt, you might be considering a variety of debt relief options. Debt settlement is a popular option for those who owe a lot of money.
Scam firms, on the other hand, have always tarnished the image of debt settlement. Understanding the benefits and drawbacks of the debt settlement process will help you determine if it is the best choice for you on your path to financial freedom.
How does debt settlement work?
Debt settlement is the method of arranging a debt settlement for less than what you owe. Mostly, the borrower pays the agreed-upon settlement to the creditor in one lump sum. This procedure will only take place if you are behind on your payments. Since you haven’t been making payments, creditors are more likely to seek a settlement if they believe they won’t be able to recoup any of your debt otherwise. Creditors would also be more likely to reach an agreement if you can demonstrate that you are experiencing financial hardship. A settlement is meant to be mutually beneficial to both parties. You have the option of negotiating with the trustee on your own or working with a debt professional.
If you want to deal with a debt counselor, you would most likely make a monthly contribution to their office. This allowance will be used to save money to pay off your debts. The debt settlement firm will contact creditors on your behalf in order to reach an agreement. This process will take anywhere from a few months to a few years, depending on how much debt you owe and how many creditors you have. Debt settlement, like any other form of debt relief, has advantages and disadvantages.
The Benefits of Debt Settlement
Reducing Your Debt
The most apparent benefit of debt settlement is that you can pay less than what you owe. This, of course, will help you get out of debt faster than if you were actually trying to make payments on your own.
Putting an End to Collection Calls
Borrowers often seek debt relief because they are tired of being threatened by creditors and debt collectors. If you settle your debt, you will be able to escape the collection calls and recover your peace of mind.
Keeping out of Bankruptcy
Another significant advantage in debt settlement is the avoidance of the need to apply for bankruptcy. Bankruptcy can have far-reaching and long-term consequences for your finances. Debt settlement is often regarded as a preferable option.
Improving Your Credit Score
One popular misconception about debt settlement is that it would wreak havoc on your credit score. Most of the time, if you’re looking for debt relief, you’re behind on payments and have a high credit usage ratio. Both of these factors indicate that your credit is probably in bad shape. Debt settlement does include allowing any of the accounts you want to settle to become delinquent, which would temporarily damage your reputation. However, since your
loans will be paid off by the conclusion of the arbitration period, your credit score will increase – dramatically in some situations. Some clients also note an increase in their score before completing the process.
The Drawbacks of Debt Settlement
Consequences of Taxation
When you borrow money from a creditor, you are legally required to repay the debt. You cannot avoid this obligation by settling your debt. As a result, if you settled a debt for more than $600 less than what you owed, the creditor would give you a 1099-C form. This form outlines the settlement and notifies the IRS that the difference between the amount due and the amount settled is taxable income. However, if you can demonstrate insolvency, you might be exempt from paying taxes on this number. Furthermore, the amount you will pay in taxes is usually preferable to having to pay off your entire balance.
Long-Term Impact on Credit Report
Your credit report would reflect any debts that are resolved rather than paid in full. For seven years, your debt settlement will appear on your credit report. It could be more difficult for you to obtain new credit. However, if you focus on developing good credit habits, this will have less of an impact over time.
Unwillingness of Creditors
In certain situations, the creditor may actually refuse to negotiate the terms of your account. Debt settlement is never a sure thing. Working with a specialist, on the other hand, is advantageous in these situations. Debt practitioners typically have long-standing relationships with creditors and therefore understand the best methods for negotiating a settlement.
Many debt settlement firms are just interested in taking your assets. Do your homework before working with a business. Read online reviews and seek referrals from other financial practitioners, such as your financial planner or account manager. A trustworthy debt relief organization will have a physical address, not a PO box, and you will be able to speak with a live person on the phone. Furthermore, respectable firms would not advertise the ability to resolve all debts for a certain sum or in a certain amount of time. Since each person’s condition is unique, it is difficult to make these statements in practice. If something seems to be too good to be true, it most likely is.
When you’re in debt, it may seem like there’s no way out. Debt settlement can be a frightening prospect because it has a poor reputation. Debt settlement, like any other debt relief option, has advantages and disadvantages. You will decide if it is the right path for you by weighing them.
Speaking with a financial advisor will also assist you in making your decision. Liberty Debt Consulting experienced team is here to help. We will assist you in determining the best option for you and your financial situation. Call us at (888) 304-6766 for a free consultation, or fill out our short feedback form and we’ll get back to you!