Debt settlement: What are the pros and cons?

Debt settlement: How does it work and what are the pros and cons?

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Debt settlement frequently works as a good debt relief solution for people who have accumulated a huge amount of debt. A particular portion of their outstanding balances is waived. You can perform debt settlement on your own or with the help of a third party settlement agency. Hiring a reputed third party agency often proves to be more productive since they have the skills of negotiating with your creditors and reducing up to 40%-60% of your outstanding balances.

Why creditors accept debt settlement

It’s an appalling disclosure that 1.5 million individuals filed for bankruptcy in 2009. Bankruptcy creates severe financial difficulties for the creditors since they get nothing from it. Their business is adversely affected. They feel that settlement is a better option since they might recover 50% of the outstanding balances as a minimum. Some debtors prefer to go for another loan to pay off their dues but typically fail to repay this new loan and get into more debt. Because of this reason, lenders have become stricter on offering loans to consumers who’re already into debt. They think settlement is an improved option for them.

What is the procedure of settling your debts?

When you sign up for a settlement program with a third party agency, you’ll be asked to stop making payments to your creditors. Instead, you would have to make monthly payments into a settlement account or trust account. The money accumulated in the trust account would be used to pay off your creditors or collection agencies. When the money starts accumulating slowly, negotiations start taking place with your creditors. When you and your creditors arrive at a mutually agreeable settlement plan, your creditors are paid off one by one. The entire procedure might take 12-36 months. You become debt free and you don’t have to be anxious about paying your outstanding balances of credit cards, utility bills, unsecured personal loans and medical bills.

What are the benefits of settling your dues?

When you settle your dues, you typically get the following benefits:

1. Faster repayment of your bills
2. One monthly payment in place of multiple payments to your creditors
3. Your accounts are re-aged and brought back to current status
4. Your late fees and over limit fees are eliminated
5. You achieve financial freedom
6.You are protected from creditor harassment

What are the downsides of debt settlement?

Given below are some drawbacks of settling your bills:

1. Your credit score is hurt since you’re making a part payment and not a complete payment
2. The amount that is reduced from your balances has to be shown as income in your federal tax returns.
3. Settlement isn’t particularly helpful if you have a small amount of debt.

Debt settlement is not the right choice for everyone. If you want to go for it, you should analyze its pros and cons comprehensively.

Guest Post By Lewis