By now, you have probably heard the advertisements about debt settlement. If you’re struggling with debt, you may be wondering if a debt settlement company can help you. Everything can seem like a good idea when you’re buried under piles of debt, but debt settlement isn’t always the best solution.
Like most things, your situation is a better indicator of whether debt settlement is the best way to resolve your debt. In addition, some debt settlement companies are not legitimate and are scams designed to target people who are desperate and willing to try anything.
However, just because some debt settlement companies are scams does not mean they all are. In some situations, debt settlement companies represent a viable option to help you better manage your debt long-term.
Every debt settlement company has its settlement policies and terms, so it’s always a good idea to read the fine print and ensure you understand key details, such as your expected interest rate, reduced overall debt, and repayment period, before signing anything.
Suppose debt settlement is the right option for your financial situation. In that case, you should investigate offers from several debt settlement companies to see who can offer you the best terms before signing. Debt settlement will still leave you with a balance owed, so you want to ensure you get the best rates, just like any other loan you consider taking on.
With that in mind, the following will outline a few of the biggest pros and cons of debt settlement to help identify if it is a good choice for you. Take a minute to analyze the debt settlement pros and cons carefully and then decide if the benefits of debt settlement will outweigh the disadvantages in your particular scenario.
What Is Debt Settlement & Is It Right For Me?
Before delving into the pros and cons of debt settlement, it’s a good idea to take a moment to define what debt settlement is. Debt settlement usually asks a creditor to reduce the amount you owe in exchange for an upfront payment.
For instance, they may accept your offer if you owe $500 but are willing to pay $298 now. Instead of communicating directly with the company, the debt settlement company you work with will intervene on your behalf. However, sometimes they will also take a cut out of that figure, so if the company offers you a settlement of $298, they may pass it on to you as $350. Many of the best debt relief companies can reduce your monthly payments by 25% or more. But most importantly, they can help you get out of debt much quicker. Some customers can see their debt resolved within 1 to 3 years, whereas if they do nothing, it could take up to 20 years due to the high interest rates.
Other times, the debt settlement company may offer you a loan to take the settlement offer, but interest rates are usually attached to the offer. These are all things you need to be careful about, which is why no one should rush into a debt settlement proposal until they have carefully analyzed the pros and cons of debt settlement.
Benefits of Debt Settlement
The most significant advantage of debt settlement is that it may help you keep your head above water for a more extended period, especially if you have substantial amounts of debt starting to drown you. Debt management plans and counseling programs are great avenues for resolving debt, but do not offer fast results. On the other hand, debt settlement can help people find immediate solutions to their debt by lowering the total amount they owe, helping them get back on top of their financial situation. Two to four years is a reasonable time frame for legitimate debt settlement programs.
Another significant advantage is that debt settlement can help you avoid the costly consequences of bankruptcy. If you are close to losing your home due to massive debt or being sued, debt settlement may be a better option. Even though you will take a credit hit from debt settlement, it will not be as harmful as bankruptcy to your credit history.
Along that train of thought, debt settlement can help you avoid being sued for a past-due debt, which is particularly problematic if you have assets that could be counted against you in a lawsuit, such as vehicles or a mortgage.
Cons of Debt Settlement
Of course, lowering your debt has a few strings attached because nothing is free. While your debtors may agree to accept a lower price, they will still report the debt settlement, which can impact your credit history. Debt settlement can affect your credit for years and your ability to secure future loans or interest rates. Sometimes, it can even reflect poorly when you apply for a job.
Second, there are a lot of scams out there, and debt settlement providers often charge high fees in exchange for “helping you” negotiate your debt. Some companies will tack on fees in the thousands to help you get your final debt amount down, and their fees are piled on top. Avoid shady debt relief companies by only working with a licensed debt relief firm in your state. Also, consider a debt settlement attorney or licensed law firm that can represent you when dealing with aggressive creditors.
You could also pay a debt settlement company a fee to help, but the creditor refuses to settle. Creditors do not have to accept a debt settlement; if they do not negotiate, you will still owe the creditor and lose the fee you paid to the debt settlement company.