Weighing the Disadvantages of Debt Settlement

Share There are disadvantages of debt settlement that must be considered, while it may appear to be an easy way to end debt without entering into bankruptcy.

Is the benefit of paying only a small portion of what is owed worth the potential trouble? That is for each individual to decide.

In order to settle debt, creditors will accept a one time payment of a percentage of what is owed, but as most of those who qualify owe a great deal of money, this amount is, more often than not, beyond what they are able to pay.

If such is the case, debt negotiations are stalled and they are no better off than when the negotiations started, perhaps even worse.

Also, when a portion of the debt owed is forgiven by the creditor, this portion is considered taxable income, and the government will demand its fair share.

If one cannot afford to pay the taxes on this amount, they will soon find themselves in debt to another creditor, the Internal Revenue Service. The fact that the IRS will not enter into debt negotiations is another of the disadvantages of debt settlement.

For those who experience panic attacks at even the thought of collection calls, one of the key disadvantages of debt settlement is the fact that these calls will not stop. In fact, they often increase.

There are things that can be done to prevent this, but there are no guarantees.

Anyone considering entering into the debt settlement process must accept the fact that collection calls are inevitable.

Some settlement companies will make use of Cease and Desist letters in an attempt to stop collection efforts. Although creditors are, according to the law, supposed to stop harassment upon receipt of such a letter, this does not always happen.

Some will claim never to have received them, while others will attempt to circumvent them by transferring the debt to a law firm.

Read useful tips in dealing with your debt collectors and creditors here.

This brings us to another disadvantage of debt settlement, the potential for legal action on the part of the creditor.

The fact that a creditor is in negotiations with a debt settlement company does not stop said creditor from suing the debtor for the amount they are owed.

If the case makes it to the courts, there is the potential for wage garnishment and the court-ordered payment of the entire balance owed.

The debt settlement process will also have a profoundly negative effect on one’s credit report. This information will not disappear quickly. In fact, debt settlement can remain on a credit report for up to ten years.

Considering that it is customary for bankruptcies to be removed after seven years, this would be a distinct disadvantage of debt settlement versus bankruptcy.

Finally, debt settlement is not intended for those who only owe a small amount or who are only a couple of months behind.

This process is designed for individuals who are several months behind on payments, or are, for whatever reason, incapable of paying at all.

For these people the disadvantages of debt settlement are sometimes things they are facing anyway.          

In closing, debt settlement can eliminate your debt for only a fraction of what you owe. But the amount that you have pay is not the only thing you have to consider.

The disadvantages of debt settlement must be weighed against the potential gains. And whether or not it is appropriate must be judged by each individual.

Because simply, each individual's financial situation is unique to each other.

The fact is, debt settlement is an option and not a cure-all remedy for debt problems. Consider all angles before making an informed decision.

Back to Debt Settlement