Pros and Cons of Debt Settlement

The following is a guest post by Diana Perkins from Debt Consolidation Care, a debt community site.

If you have overdue credit cards and personal loans, then you must be looking for some kind of debt resolution. If you think that you can’t afford to pay your dues in full, then you need to look for the best debt settlement company that can settle your debts. But you need to consider the pros and cons of debt settlement as a debt relief option before committing to it. Read on to know about them.

Pros of Debt Settlement

Most people are attracted to debt settlement companies because of its multiple benefits:

Frees You of Debt Fast
Through a debt settlement, you have to pay much less than what you actually owe. This helps you to get rid of debt fast. You become completely free of debt within 24 to 36 months and you can further rebuild your credit.
Reduces Debt Amount Considerably
Unlike other debt relief options, the best debt settlement company will attempt to reduce debt considerably. Your debt advisor will immediately negotiate with your creditors and reduce the debt amount by 40-50%. The remaining amount is forgiven by your creditor.
Relief from Collection Calls
When you’re settling your debts with a debt settlement company, you stop paying your creditors and instead deposit funds into a trust account set up by the company. As you start falling behind on your payments, you will receive collection calls. The debt settlement company will handle these calls on your behalf, so you won’t have to deal with the harassment.
Saves A Lot of Money
You can save a lot of money by settling your debts, since the creditor agrees to forgive a large part of your outstanding debt, you save a lot of money. You can utilize this money in some other debt obligations or you can simply put aside that amount for future use.

Cons of Debt Settlement

Taxable Income
The amount that you save through debt settlement is considered as income. Since you save a substantial amount, this income is subject to federal income tax. Therefore if you think of utilizing your savings in some other way, then you have to set some money aside for paying the income tax.
Affects Your Credit Score
Debt settlement can affect your credit score. The reduction in points can be as high as 125 points.

Debt settlement is surely a successful debt relief option but it is generally considered by those who can no longer pay off the debts and are thinking of filing bankruptcy. Before choosing a debt settlement company, take into account the pros and cons of settling your debts and consider all your debt relief options, such as a debt management plan.