Benefits and Risks of Debt Settlement

Going through the process of debt settlement is typically not one that anyone wants to deal with. However, when you get in over your head with debt, you need to do something. Here are the benefits and risks associated with the debt settlement process. 

Benefits

  • Eliminate the debt- When you are in debt, getting out of debt is really your only priority. When you finally get out of debt, it is a great feeling and it can help you. If you have ever tried to get a loan while you had a lot of debt, you know that it is tough. Lenders look at your debt to income ratio and are not willing to work with because of the high debt load. When you eliminate your debt, you open up the lines of credit for future possibilities.
  • Save money- When you successfully navigate through the debt settlement process, you will save quite a bit of money. Depending on how big the debt is and how badly the company wants to settle, you could save thousands of dollars. It is very common for a company to settle for less than half of what you owe. This can be a huge financial gain for you, if you have the money to settle.
  • Stop collection- One of the worst parts about owing money is the debt collection process. When you have delinquent accounts, debt collectors will continually call you and try to collect the money. They may call you every day, sometimes more than once a day. They will mail you letters and take whatever means is necessary to collect the debt. They may even file a lawsuit against you. 

Risks

  • Damage your credit- The biggest risk that comes with debt settlement is the potential damage that you can do to your credit. When you settle a debt, the creditor is taking less money than what is owed. Creditors will typically report this to the credit bureaus as "settled for less than owed." This will be a blemish on your permanent record that other potential lenders will see. This might scare them off and make it very difficult for you to get a loan in the future. You can negotiate a debt settlement that does not hurt your credit if the company is willing to remove any negative statements on your report. However, if you do it incorrectly, it can damage your credit.
  • Tax implications- While you are getting a discount on the debt and saving money on the front end, the money is not entirely free. You will have to pay income taxes on the money in the year in which the debt was settled. The company that settled the debt will send you a 1099-C tax form and report it to the IRS. Therefore, you have to report the income or risk penalty of the law. 
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