If you’re struggling with debt, one solution you might consider is debt settlement. This process involves negotiating with your creditor to pay a lump sum that’s less than the total amount owed. Companies like Debts free home often assist with this, offering a potential path to financial freedom. However, debt settlement has its pros and cons, which you should understand before making a decision.
Pros of Debt Settlement
- Avoiding Bankruptcy:
Debt settlement can help you avoid declaring bankruptcy, which can stay on your credit report for up to 10 years and have long-term negative impacts on your financial future. - Saving Money:
One of the biggest advantages is that you may pay less than the full amount you owe. For example, if you owe $20,000, a creditor might accept a $15,000 lump-sum payment to settle the debt. - Saving Time:
Debt settlements can be completed in as little as two to four years, which is faster than some other methods like Chapter 13 bankruptcy or debt management plans that can take three to five years. - Stopping Collection Calls:
Once you settle a debt, collection calls and other forms of contact from debt collectors will cease, which can significantly reduce stress. - Avoiding Legal Trouble:
By settling a debt, you might avoid being sued by a creditor seeking to recover what you owe.
Cons of Debt Settlement
- Paying Fees:
Debt settlement companies typically charge fees ranging from 15% to 25% of the enrolled debt. It’s important to note that reputable companies will never charge upfront fees, as this is illegal. - Raising Funds for Settlement:
To settle a debt, you’ll need to make a lump-sum payment. Companies like Debts free home require you to make monthly deposits into a savings account until you’ve accumulated enough to settle the debt. - Limited Debt Coverage:
Debt settlement usually only applies to unsecured debts like credit cards, personal loans, and medical bills. It does not cover secured debts like mortgages, auto loans, or child support. - Paying Taxes on Forgiven Debt:
The forgiven portion of your debt may be subject to federal taxes, which could lead to a surprise tax bill. - Impact on Credit Score:
While debt settlement can help you avoid bankruptcy, it may still negatively impact your credit score. Settled debts are reported to credit bureaus and can lower your credit score, though this is often less severe than the damage caused by unpaid debts.
Alternatives to Debt Settlement
- Debt Consolidation Loan:
A debt consolidation loan combines multiple debts into one payment, often with a lower interest rate. However, this option may be difficult to obtain if your credit score has already been affected. - DIY Debt Settlement:
You can attempt to settle your debts on your own, avoiding the fees charged by settlement companies. However, this requires more time and effort on your part, as you’ll need to negotiate with each creditor individually. - Credit Counseling:
A nonprofit credit counseling agency can help you create a budget and offer advice on managing your debts, though you’ll still be responsible for paying off the loans. - Debt Management Plan:
This plan, often recommended by credit counselors, rolls your debts into a single monthly payment with lower interest rates. However, it typically doesn’t reduce the overall amount of debt. - Bankruptcy:
As a last resort, bankruptcy may be your only option. Chapter 7 bankruptcy wipes out most debts, while Chapter 13 gives you three to five years to repay. Bankruptcy significantly damages your credit score for years to come.