Do you have to pay more on your credit card each month than you can afford? If so, you probably can't afford to put more money toward each account, which would help you pay off your credit card debt much faster than if you just made the minimum payments. If you're frustrated and feel like you'll always be in debt, it's time to take a realistic look at your situation to figure out how to get out of debt.
But before you look at your options, take a few minutes to cut up your credit cards. Those little pieces of plastic have done you nothing but hurt you. In fact, they've probably caused a lot of sleepless nights and constant worry about money because they're so big.
Now, if your credit card debt has put you in serious financial trouble and you've thought about bankruptcy, a consumer credit counselling service, debt consolidation, and debt settlement as ways to get rid of your debt, you may have decided that debt settlement sounds like the best way to get out of debt. If so, you probably have some questions or worries about debt settlement, and who can blame you? After all, each possible choice has pros and cons that should be carefully looked at.
Let's start with what could go wrong with debt settlement:
- Credit Score: If you have a pretty good credit score, it's likely that it will go down during the debt settlement process. You see, if your bills are paid on time and you try to talk to your creditors about lowering the amount you owe, they won't take you seriously. Creditors don't really care if you're having trouble paying your bills, so they won't help you unless your account is really behind. If you don't pay your bills for a few months, creditors won't help you until they see how bad your financial problems are. So, yes, debt settlement may hurt your credit score if you have a good one.
Tax Liability: If you settle your debt, you may have to pay taxes when you file your income taxes. See, creditors have to tell the IRS about any debts forgiven that are worth more than $600. You'll get an IRS Form 1099 for the amount of the forgiven debt, but it's important to talk to a tax expert because you won't have to pay income tax if you were considered "insolvent" at the time you negotiated and paid your settlement(s). For this category to apply to you, your debts must be bigger than your assets.
- Enough Money: If you're thinking about debt settlement, it's important to know that you'll need enough money to follow through with a deal you make with your creditors. If you don't have enough money, the deal you negotiated will be null and void. In other words, if you owe $40,000 on an account and your creditor agrees to take 50% or less as full payment, you must be able to make that payment by the due date.
Creditors often agree to accept the settlement amount in 4–6 instalments to make sure that the settlement agreement is carried out.
Even though the negative effects of debt settlement mentioned above are common, there are also many positive effects that should be taken into account.
Debt-free status is reached in a shorter amount of time - In contrast to debt consolidation, consumer credit counselling, or Chapter 13 bankruptcy, the debt settlement process can be finished in a matter of months, depending on how quickly you can get the money to pay your creditors the lower settlement amounts. You see, both consumer credit counselling and debt consolidation loans involve long-term payment plans that can last anywhere from 5 to 10 years. In Chapter 13 bankruptcy, you also have to pay back your debts over a long period of time, usually about five years. So, if you want to get rid of your debt as soon as possible, you'll be happy with your choice to use debt settlement to settle your different creditor accounts.
- Better Credit Score: Debt settlement may hurt your credit score at first, but in the long run, it will make it much better. You see, one of the most important things that goes into figuring out your credit score is how much debt you have. Once your creditors let the credit bureaus know that your information has changed and that your accounts have no balances, your credit score will go up right away. Also, as time goes on, the bad things on your credit report will have less of an effect on your score. Chances are, your credit score will be better a year after you finish the debt settlement process than it was before you started the process.
- Debt Settlement Can Help You Get Out of Debt - It can be hard to decide to join a debt settlement programme. You may have been having trouble paying your bills for a long time, and changing your "money methods" can be unsettling. Still, most people who choose debt settlement feel a lot better once the process starts, and they feel even better when all of their accounts are paid off and no more money is owed. You can't put a price on not having to worry about money and having a worry-free life.
Like most decisions you have to make, figuring out how to solve your financial problems requires you to look at and think about many things, both good and bad. In the end, it's important to make your choice based on what you need and what you can do.
