Debt settlement is one of the cheapest ways to lower your unsecured debts. With the right kind of direct creditor negotiations, it is useful in eliminating debt. Also known as debt resolution, this process is highly predictable and beneficial to both consumers and creditors. If you’re unable to repay your debt and have delinquent accounts, you may consider this.
However, before you jump in, learn about debt settlement pros and cons. Read below for some helpful advice on the crucial things you need to consider. Sometimes you get a call from Portfolio Recovery Associates so it’s important to be ready in advance.
Getting the Settlement Amount in Time Can be Difficult
Your creditor will agree to settle when you pay part of the owed amount. For them, getting a significant portion of the debt in one payment is better than none. But before you enter these negotiations, you should collect a sufficient amount in a short period. If financial hardship is the reason for your nonpayment, amassing the settlement money can be hard.
Your FICO Score may get Adversely Impacted
One of the consequences of a debt settlement arrangement is a lowered credit score. Your FICO ratings may get negatively affected, more so if you have high scores before this. Even if you pay the negotiated amount, your credit report will reflect the settlement. Your credit card account may get closed, but the score stays low for seven years.
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There may be Tax Implications
If the debt reduction you achieve is $600 or more, your lender has to notify the IRS. Whatever savings you make through the debt relief services are taxable. For instance, you owe $10,000, and the creditor settles for a one-time payment of $6,000.
The IRS considers this reduction of $4,000 as taxable income. However, if your situation qualifies as insolvency, it can reduce your tax liability. If your debts exceed the fair market value of your assets, you are insolvent.
You May Face Legal Consequences
The debt collector has no obligation to settle. Moreover, interests and late fees may accrue on your debt. Some creditors can even threaten to file a lawsuit against you. If they win, they may put a lien on your assets or garnish your wages. However, for an old debt, the statute of limitations may have expired. And it is your responsibility to raise the grounds for defense.
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Getting Peace of Mind through Debt Settlement
Though it’s imperative to understand debt settlement pros and cons, the advantages of debt relief programs far outweigh the risks. Once it is resolved, you will be free of debt in a short span.
- You Pay Less: When you are gathering the settlement amount, you pay a lower monthly payment. Compared to other options, the interest accrued is less. Furthermore, the service charges and payments do not exceed the debt and interest put together.
- No Penalty: You pay the debt relief company only after your settlement goes through. During this process, if you decide to back out, you can do so without paying the penalty.
- Avoid Bankruptcy: Filing bankruptcy means losing part of your assets. You have to go back and build your credit score. It remains on your credit report for almost ten years.
- Flexible Payments: You can pay the settlement amount in a lump sum. Or, you may negotiate a flexible payment plan with your creditor. Some may opt for up to five years to repay the debt.
Everyone’s financial situation is different. So, there is no one-size-fits-all approach. Talk to the experts to learn more about debt settlement pros and cons. They can help you find the best way forward.