The Downside of Debt Settlement: What You Need to Know

Debt settlement has become increasingly popular these days because of the economic crisis that has forced many to resort to negotiations with their lenders. While some opt for a consolidation loan, others choose debt settlement as a means to alleviate their financial burden. Payment of the debt means that the lender agrees to set aside a portion of its debt, as long as the debtor continues to make monthly payments for the remainder of their debt.

refinancing a mortgage

Some lenders will only consider debt settlement as a lump sum rather than monthly payments. This is something that can be of great help to someone in a difficult financial situation, but there are also disadvantages of this method.

Unsecured debts such as credit cards, personal loans, medical bills and store credit cards are more likely to be open for debt settlement. The only recourse the lender has is to sue the borrower for the unpaid amount. Secured debts such as auto loans and home mortgages are less likely to be open to negotiation.

A major disadvantage lies in the tax department. The fact that part of the debt was forgiven could be considered income. The debtor received the money and no longer has to pay it back. This could very well mean an increase in taxes. If part of the owed debt is because of late fees and high interest penalties it may be possible to exclude these as income.

Probably the main drawback for debt settlement is that the credit scores of the person will be negatively affected. This means that the person will have difficulty obtaining a loan in the future. Something that could make things more difficult when it comes to buying a car, a house, or, depending on the situation, even renting an apartment can be difficult.

Lenders may also file a lawsuit against someone up until the renegotiated loan amount is paid, even if payments are being made. If this happens the debtor may have to pay legal fees, as well as the debt in full, according to the results of the judgment.

debt solutions

Debt settlement is an option but is not something that should be considered lightly. The short-term results are breathing room for the debtor. The long term results are a ruined credit score for up to seven years until the negative reports are out of date. Desperate times call for desperate measures. Debt settlement is an option for you in a difficult situation.