Thinking About Debt Settlement? You Should Know These 4 Things Before Making a Decision

Accredited debt relief

Of all the debt relief options out there, you may be most drawn to debt settlement. After all, what this typically includes is your creditors agreeing to collect less than what you owe. While this may be the right move in some cases, it’s not as simple as it sounds. Here’s what you need to know about debt settlement services:

  1. Debt Settlement Services Aren’t Free

    Settlements are usually overseen by for-profit debt settlement companies. Naturally, since these companies negotiate the arrangements, they expect some money for the work they do. Know, however, that you shouldn’t have to pay any fees until your debts have actually been settled, since your creditors are under no obligation to agree to the proposed settlement.

  2. Debt Settlement Impacts Your Credit Score

    Accounts shown as “settled” on your credit report hurt your score. The good news is that they lower your score less than accounts that are permanently delinquent. There are a few other things to watch out for during the settlement process: Your debt settlement company may also advise you to stop paying your monthly bills, which can lower your credit score and incur additional fees and fines.

  3. Savings Are Taxable

    Depending on the amount and your financial situation, any savings you get through a debt settlement program may be taxable. Of course, that tax amount won’t be as much as you would have paid to your creditors, so it’s still an overall gain. But you’ll want to take that tax into account when deciding how much you actually stand to save through settling.

  4. Not All Companies Are Reputable

    Unfortunately, there are some greedy companies looking to take advantage of your situation. Unscrupulous debt settlement companies may promise you unrealistic settlement rates (30-50% of your debt amount), charge high fees and use confusing legal contracts. Look up any company on the Better Business Bureau before you sign a contract, and make sure no complaints have been filed. Debt settlement is the right path for some people, but some consumers are tricked into an even worse situation.

Does this sound too risky for you? If your debt is just starting to get out of control, you might want to consider debt counselling instead.

Do you have any other debt settlement advice to share? Join the discussion in the comments.

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