To settle or not to settle

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debt To settle or not to settle

In today’s credit driven world, everyone has some debt to settle. It could be student loans, or a mortgage or even a car loan. A lot of consumers decide to settle their debts with their creditors through a process of debt settlement. The consumer agrees to pay the creditor a reduced sum in full payment as a lump sum. That way, the creditor gets back a substantial amount of money at one go and you get to write off a debt from your life. However, there are quite a few pros and cons to this. So, before going in for debt settlement, do your research and then take an informed decision.

Advantages of settling debts

The biggest advantage is that the debt will be quickly written off. This means that each month, there will be one less payment to make, ensuring that you save more money for the essentials in your life.

The amount that you repay the creditor will also be a drastically reduced sum. Usually, that is one of the biggest draws of settling debts. You save a lot of money, especially on the interest you would have to pay if you had stretched it out to full term.

Another advantage is that the payment arrangements can be pretty flexible. Working with a settlement company is very convenient because they can make changes to your payment arrangements if you want to.

Settling a debt is a much better option if bankruptcy is staring you in the face. Also, settlements usually have a very short repayment time of between 3-5 years.  Financially, it’s a much more feasible option to work harder to pay it off during that time, than declaring bankruptcy.

The cons of settling a debt

However, debt settlement can come for a price. If you are willing to pay it, then read on to see what you are signing up for.

Firstly, your credit report will take a big hit if you go in for debt settlement. Although it will show that your debt has been paid off, it will also reflect that you settled it for a much lower amount, thus giving the message to future creditors that you might do the same with them.

Another point to remember is that the amount of debt that you didn’t pay, or was taken off the lump sum amount will be counted as taxable income. So you will automatically have to pay tax for the difference. Another catch here is that earlier you were paying income tax depending on your income. Now post debt settlement, if the difference in amount is very high then your income tax bracket might be pushed into the next higher bracket, as that debt amount added might make a big difference to your income.

Your debt balance will also increase while the debt settlement negotiations are going through. Given that the creditors might even reject the settlement offers, you might have to go back to paying an even higher amount if the talks have failed.

So, in case you are going in for debt settlement, just remember to do so only if you are not planning on taking a loan anytime soon after that. Also, make sure you have enough money left over to pay the taxes, late fees, etc and still have something left over to live on. Settling a debt earlier shouldn’t leave you penniless.  Finally, if you do go ahead, then always remember to choose a well reputed provider who will do the negotiations with the creditors on your behalf.

About the author

Anita has been working with a well established debt settlement provider for the last seven years. She has helped many individuals and families to settle their debts by through negotiations with creditors. She lives with her daughter and loves to go shopping on weekends. 

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