Debt settlement is a process wherein the debtor (the person who owes the debt) and the creditor (the person from whom the debtor has borrowed the money) come to a mutual agreement, wherein the person who owes the debt agrees to pay a part of the total sum of money that he owes as the debt - instead of clearing the entire outstanding amount. While bankruptcy is indeed an option for cases of debt-gone-bad, even bankruptcy lawyers suggest that it should be treated as the last option, which you can resort to after you have tried all the available means - including the process of debt settlement.
In this method, the two parties involved decide the settlement amount after negotiating with each other. In some cases, the creditor goes to the extent of reducing the balance by as much as 60-70 percent. The same has lately become one of the most popular means of getting rid of bad debt (and creditors), but the process, like any other, has its own benefits and drawbacks.
Debt settlement programs are intended to help both the parties involved - the debtor and the creditor. The person who owes the debt will be more than happy to opt for the same, as he can get rid of his debt by paying whatever money he had with him - once and for all. Though not exactly happy, the creditor would be relieved to get back a decent part of the amount he had given as the loan. But obviously the creditor would agree to opt for debt negotiation only when he realizes that the debtor will not be able to pay back the entire amount, and settlement will ensure that he will at least get a part of his money back. There is no doubt about the fact that the debt settlement programs are much more beneficial for the debtor, as he can get rid of his entire debt by paying less than what he actually owes.
Pros and Cons
Irrespective of which of the various debt reduction strategies you opt for, it is bound to have its own pros and cons - debt settlement is no exception. As we said earlier, it is a viable option, but that doesn't mean it works for everybody. In such a scenario, it is wise to asses its pros and cons before opting for the process. Evaluation of pros and cons makes it easier for the individual to decide whether he should go for debt settlement or choose some other debt reduction assistance programs.
ProsOver the period, debt settlement has become one of the most popular methods of debt reduction and the positive attributes of this process (which are enlisted below) have played a crucial role in adding to the popularity of this method.
- When you opt for debt settlement, you end up paying far less than what you actually owe to the creditor. Depending on the creditor and the process of negotiation, you can save around 40 to 60 percent of the money that you owe in the form of debt.
- If compared with bankruptcy, it is a far more convenient option to get rid of your debt. The process of declaring bankruptcy is full of hassles, and it end up damaging your credit.
- You don't necessarily have to avail the services of an attorney when opting for debt settlement. The process is relatively easy, and you can do it on your own by getting a good understanding of the basic concepts.
- If the negotiation part is well handled, you may even get lucky enough to get the interest amount eliminated. Even the penalties incurred owing to delays or omissions can be considered for a skip when negotiating.
- Last, but one of the most important benefit, is that by paying the amount in a single payment, the debtor can have some peace in his life - free from constant harassment from the part of the creditor.
ConsOf course, all the benefits mentioned above are quite lucrative, but everything is not so simple. Below listed are some of the prominent debt settlement cons that you have to take into consideration before you opt for it.
- It facility is only meant for people who are facing difficulty in paying the debt or those who are lagging behind on the payment, and not for those who are financially sound.
- The law states that any debt above $600, when forgiven, is subject to tax. This means that you will have to pay the tax on savings when you opt for debt settlement.
- Like any other means of evading debt, will end up affecting your credit score.
- The creditor can, by law, mention "Paid by Settlement" on your credit report when you resort to this settlement process, and this may make it difficult for you to get a loan later.
- When you avail the services of debt settlement company, you may have to pay a part of the debt to the settlement company as the fee.
- Not all the creditors are willing to provide the debtors with such settlement option. In fact, some creditors may also start treating you in a harsh manner if you try to initiate the settlement process with them.
In case of debt settlement, the pros seem to be far more lucrative than the cons - and that makes it one of the best means of getting rid of all your debts. Though it may seem an easy task, quite a few 'ifs' and 'buts' come into play and make it a bit tedious. The biggest problem is the fact that none of the creditors will be willing to let go of the money you owe him. You will have to go through a series of debt negotiation meetings for the settlement process to work. While debt settlement companies will be of some help, their services will only come for a price. The entire process will fall in place only when both the parties come to common terms, and that will take some time and a lot of efforts from your side.