Disadvantages of Debt Settlement

If you find yourself facing a mounting pile of debt that is keeping your from reaching your financial goals, it is important to understand all the options available to you in regards to debt elimination. There are several methods of eliminating debt, some that have more risks and disadvantages than others. The only way to really eliminate debt with no risk or possible consequences is by paying it in full, on your own through aggressive repayment. Whenever you utilize another method there are pros and cons which you should be fully aware of in order to avoid finding yourself facing more, not less financial stress in the future. Here we will cover the disadvantages of debt settlement- a popular, legal method of reducing your debt by negotiating a settlement for less than the amount you currently owe.

•There are no guarantees- This method of debt elimination is risky in that there are literally no guarantees. Whether your creditor agrees to a settlement and if so what amount is something that can not be predicted. Whether you will have the funds available to take advantages of debt settlement offers is also not guaranteed as you have no idea how much money to put aside in your settlement account. For this reason it is important to save as much money as possible to take advantage of settlements when they are on the table.

•Impact on your credit- In a world where creditworthiness is everything, anything that hurts your credit history or score is something to be avoided. Debt negotiations only take place once an account is past due, therefore the very act of settling a debt will have a negative impact on your credit. Not only will your account show as past due; if you are successful in negotiating a settlement it will appear on your report as settled or paid (less than the amount due). This will be viewed as a negative by future lenders. On the other hand if you are already behind on your payments, debt settlement will not hurt your score any more than it already is, in that settled accounts are view more favorably than accounts that are remain unpaid.

•Tax consequences- Any debt forgiven over $600 has to be reported to the IRS. You may find yourself liable for paying taxes on that amount if you are unable to prove you were in fact insolvent at the time of settlement.

•Stress- There is no doubt that being unable to pay your bills can be stressful. Add to that the constant hounding of bill collectors and collection agencies and it can become almost too much for many people to bear. Although many debt settlement companies suggest they can stop the calls, this in fact is not true. Your creditors have every right to contact you in an attempt to collect the money they are owed, however once your debt is turned over or sold to a collection agency, there are certain rules they must follow to ensure you are not being treated unfairly. All things considered however, the worry and stress of eliminating debt is a very real disadvantage.

•Legal issues- While it is less common than most people believe, there are situations which result in legal actions taken against a person who does not repay their debt in full. Although unlikely, there is always the possibility your creditor will decide to pursue legal actions to force you to repay your debt in full. Please note that this can not happen without your notice, therefore anyone trying to collect a debt claiming to hold you paycheck or put a lien on your property cannot do so without actually taking the steps necessary to start the legal process.

These are a few of the disadvantages of using debt settlement as a form of debt elimination. It is important to remember that most people considering debt settlement are already behind or about to fall behind in making their payments, making many of these issues a moot point. For example, whether or not you decide to use debt settlement if you fall behind on your bills you will still face the possibility of legal actions, negative marks on your credit and stress from dealing with bill collectors.