Debt is becoming a major problem in the US, with almost 35 Trillion National Debt overall. If you are also suffering with debt, it's not the end of the world. There are multiple solutions to this problem and debt settlement is one of them.

Debt settlement simply means paying a certain amount of money, which is less than what you owe. The amount will be fixed through negotiations with your debt settler. But, it is a risky route that should be taken with caution.

If you want to go for debt settlement, then you should know about the pros and cons of it clearly. In this guide, I will explain the key advantages and disadvantages of debt settlement so that you can decide whether debt settlement is the most beneficial option for you to take.

Key Advantages of Debt Settlement

Here are some pros of debt settlement:

1. Reduced Debt Amount

If you use debt settlement, you can have some of your debt waived by your creditors. You should negotiate to reduce the debt amount as much as possible. I advise you not to agree on an amount that you can't pay.

With a good negotiation skill, you can reduce a certain amount from the total debt. It will make your debt more manageable. Moreover, if you feel burdened by too much debt, this can be a huge relief.

1. Faster Debt Resolution

While other debt relief options allow you to pay your debts off at a slower pace for several years through installment plans, debt settlement allows you to clear your debts much faster within 24-48 months.

You will gain financial stability much faster. Moreover, it helps you minimize overall strain and confusion. You can stay calm even if you take on long-term debt in the future.

1. Consolidated Payments

If you have more than one debt, you can easily combine various debts into a single payment. That's right, you can pay multiple debts with a single payment. In other words, you can simplify a complicated process for you.

As you combine your debts, you simplify managing your money. You can easily keep track of your payments and don't have to worry about multiple debts. This way, you avoid extra fees for missing payment dates.

1. Potential to Avoid Bankruptcy

As much as it negatively affects credit ratings, debt settlement can be a wise course of action for those in a pre-bankruptcy position. It's a good idea to retain credit scores and valuable assets, even if it comes with some negative consequences.

You can maintain your financial integrity. Furthermore, you can preserve your credit by avoiding bankruptcy. In other words, it can save you from damaging your credit report.

1. End of Creditor Harassment

Once an agreement with the creditors has been made, creditors and debt collectors have no legal right to continue contacting the person in debt. This would bring relief to you if you have been receiving harassing calls day and night.

Your anxiety levels drop significantly once you stop receiving calls. Your life becomes much better. It also allows you to rebuild your financial health without constant interruptions from creditors.

Drawbacks of Debt Settlement

Here are some cons of debt settlement:

1. Negative Credit Impact

As you already know, debt settlement can reduce the amount of your debt, but it will surely impact your credit score negatively. The credit reporting companies will record the missed payments and debts that have been settled.

This negative information is allowed to be reported to credit bureaus for up to seven years. You will also face difficulties while getting loans, credit cards, homes, jobs, or other facilities which require a good credit score.

1. Tax Implications

The IRS considers forgiven debts of more than $600 as taxable income. So, after the debt is paid off, you will receive a tax invoice in that financial year. It could erase some of the debt's gains.

1. Upfront Fees

There are many qualified and reputable debt settlement companies out there. But, they charge high fees for their services. Typically, in the form of a percentage of the settled amount, ranging from 15% to 25 %. But you need to be cautious. Because these fees can quickly add up and reduce your savings.

1. No Guaranteed Outcome

Creditors accept a settlement offer based on a mutually agreeable amount. However, there is no legal provision that mandates creditors to accept such an offer. They might assist you with your payments. Yet, if you still can't pay your debt, you might find yourself in a far more dire situation than before.

1. Risk of Lawsuits

While debt settlement does prevent a person from declaring bankruptcy, creditors retain the right to sue the debtor in order to claim the entire unpaid sum in any way possible. They can also collect on the debt via wage garnishment or seizing of assets.

Alternatives to Debt Settlement

Here are some of the alternative debt relief strategies:

1. Debt Management Plans

If you don't want to settle your debt, then you should consider debt management plans. These plans are offered by nonprofit credit counseling agencies, including reduction of your payments. You can also get lower interest rates as well as the forgiveness of fees by the creditors.

1. Debt Consolidation Loans

Debt consolidation loans are also good because it involves taking a loan at a lower interest rate than the current rate. Then, you can pay off your individual debts one by one.

Alternatively, if you believe you can repay the low-interest loans, you can consolidate all debts at once. This approach may help you avoid paying high interest rates in the long run.

1. Balance Transfer Credit Cards

You can reduce debt by transferring balances to a better credit card. However, you need to have a good credit score to do this. You can also use low-APR cards or those with a zero introductory rate for a period of time. This can help you pay off debts at lower interest rates.

1. Bankruptcy

Although a last line of defense as it can impact credit rating, bankruptcy might be the best option for individuals with large and uncontrollable amounts of debt. You have a chance to start afresh.

Nonetheless, it remains on your credit report for as long as ten years. You will find it difficult to access credit, buy a house or even a job. Only consider bankruptcy as the last option.

1. Negotiating with Creditors Directly

You should first attempt to talk to your creditors and ask them to reduce interest rates. Or, eliminate some of the fees or negotiate a payment plan that is more suitable for you according to your current financial situation.

In many cases, creditors are willing to cooperate with you if you are putting an effort to repay your debt. You can tell them about your financial difficulties and suggest another plan that will be easier for you. This way, you can avoid wasting money or facing harsh penalties for defaulting.

Conclusion

Debt settlement can be of great benefit as it can provide a good opportunity to reduce one's debt to a great extent, but it also has negative characteristics and threats. If you are determined to try it, think through your situation thoroughly, compare advantages and disadvantages of this decision, and consider all the options you have.

If a decision is made to choose the debt settlement, then it is very important to learn about the possible reliable debt settlement company. In the end, you should decide whether to engage into debt settlement after reviewing the information above. Also, you should take this decision with strong determination and dedication to get out of the cycle of poor financial decisions.