Debt Settlement: The Basics

Debt settlement involves negotiating with creditors to reduce the overall amount of debt owed, typically by offering a lump-sum payment that is less than the full balance. Debt settlement is often facilitated through a debt settlement company, which negotiates with creditors on your behalf.

Pros of Debt Settlement:

1. Reduction in Debt Principal: Debt settlement can significantly reduce the total amount of debt owed, providing relief for those struggling with high levels of debt.

2. Faster Path to Becoming Debt-Free: Settling your debts can potentially shorten the time it takes to become debt-free compared to other methods, such as making minimum payments or obtaining a consolidation loan.

3. Better Option for Poor Credit: Debt settlement is often more accessible for those with poor credit, as the success of the negotiation process is less dependent on your credit score compared to obtaining a consolidation loan.

Cons of Debt Settlement:

Cost of Debt settlement: usually the bank will settle for 50-55% of the amount. The settlement company usually will charge 25-30% of the loan amount total cost 75-85% of loan amount. Very costly, over 2 times the cost of CDR.

1. Negative Impact on Credit Score: Settled debts may be reported to credit bureaus as "settled" or "paid in full for less than the full balance," which can lower your credit score. However, for those with already poor credit, this impact may be less significant.

2. Tax Implications: The forgiven debt resulting from a successful settlement may be considered taxable income by the IRS, which could result in additional tax liability.