If you are buried in debt and see no way out but prefer not to file bankruptcy, debt settlement may be your best option. Such programs involve a settlement company negotiating on your behalf with creditors to allow you to pay a lump sum that constitutes less than the full amount you owe.
To determine if debt settlement is right for your financial situation, keep the following factors in mind:
Debt settlement benefits
- An effective settlement can significantly lower your monthly payments and reduce your overall debt, allowing you to dig out of debt more quickly.
- When you finish with the program, you can funnel the money you've been using to pay off debt to savings.
- Settlement also helps you avoid bankruptcy.
Debt settlement drawbacks
- Settlement programs usually require that you deposit money into a special savings account for at least 36 months prior to settling your debts, so that the settlement company has payoff money to offer creditors. Such mandatory payments can prove difficult, so make sure you can handle this ongoing expense prior to attempting such a program.
- You have no guarantee that your creditors will agree to a settlement, and chances are some of them may not.
- Settlement companies generally encourage you to stop sending payments to your creditors, which negatively impacts your credit rating until you pay off your debts. During settlement negotiations, late fees and penalties continue to mount.
- Savings you eventually get after a settlement is reached are considered income and taxable.
Choosing a debt settlement company
Reputable companies set you up with a 24- to 36-month program and are clear about the fees involved. They will also have you send your debt repayment money to an account with an independent third party that will make payments to your creditors once settlement is reached. Avoid companies that offer unreasonable claims about paying off your debt.
When you determine this option is right for you, debt settlement is a viable method for paying off debt and moving toward financial freedom.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.