Debt Settlement Pros and Cons

Debt Settlement Pros and Cons

Debt settlement may be a helpful option for individuals facing overwhelming debt, but it's essential to recognize that not every solution is suitable for everyone. Prior to enrolling in a debt settlement program, it's crucial to weigh the advantages and disadvantages of debt settlement carefully.

What Is Debt Settlement and How Does it Work?

Debt settlement involves negotiating with your unsecured creditors to accept a partial payment as a full settlement for your outstanding balance. Debt settlement is a process where a debtor negotiates with their creditors to settle their outstanding debts for less than the full amount owed. The goal of debt settlement is to help the debtor get out of debt and achieve financial freedom

The process can be broken down into several steps: 

  1. First, you need to come up with a lump sum to offer to one or more of your creditors. This can involve borrowing money, using your savings, selling assets, or depositing funds into a dedicated debt settlement savings account instead of paying your unsecured creditors. 
  2. Next, a debt consultant acting on your behalf will contact your creditors and offer them a percentage of the total amount owed as full payment. This communication is typically done through a debt settlement letter. 
  3. If your creditors agree to the proposed settlement,  your debt consultant will draft a written agreement and send it to the creditor for their signature. 
  4. It's important only to send money to the creditor after you have a signed agreement in place. To ensure the payment is conditional upon the agreement, consider including a conditional endorsement referencing the written agreement when making the payment. 
  5. Once the account is settled, be sure to check your credit report to ensure that the balance is indeed zero.

Debt settlement presents several advantages over other debt solutions. Below are some of the pros of debt settlement: 

  • Protection of privacy: Debt settlement occurs outside of the court system, unlike bankruptcy, which creates a public record accessible to anyone, including potential employers, licensing agencies, partners, or family members. If you're concerned that bankruptcy might damage your reputation or professional prospects, debt settlement could be a better alternative. 
  • Less impact on credit scores: Debt settlement does less harm to your credit score than bankruptcy. According to FICO, bankruptcy could result in a loss of 130-150 points for a score of 680, while settling one credit card may result in a loss of 45-65 points. Similarly, if your score is 780, bankruptcy could cost you 220-240 points, while debt settlement could decrease your score by 140-160 points. 
  • Higher success rate: Debt settlement has a higher success rate than other debt solutions. The FTC reports that debt settlement completion rates average 45% to 50%, which is much higher than credit counseling (21%) or Chapter 13 bankruptcy (33%). Only Chapter 7 bankruptcy has a higher success rate of 96%, but it's only an option if your income is too low to repay your debt. 
  • Affordability: Debt settlement is more affordable than debt management plans offered by credit counseling companies, according to the FTC. Debt settlement can help you eliminate debt by paying less than what you owe. 
  • Control: With debt settlement, you only owe fees if you settle with your creditor, and you're not forced to accept an arrangement that doesn't meet your needs. In contrast, in a bankruptcy filing, the outcome is out of your control, and the judge may require you to surrender property or pay a specific amount.

While debt settlement can be a helpful debt relief option, there are some drawbacks to consider before committing to it. 

  • Creditor harassment: If you start missing payments to save up for a lump sum, your creditors may begin contacting you through various channels such as mail, online, text, or phone. In some cases, they may even file a lawsuit against you, and losing the case could result in a public record. 
  • No guarantee of success: No creditor is required to settle with you, and even if you stop making payments and damage your credit score, there is no guarantee that you will reach an agreement with your creditor. This is particularly true if your creditor believes that you can repay your entire balance. 
  • Fees: Professional debt settlement companies typically charge between 15% and 25% of the enrolled debt, which can add up to a significant amount of money. For individuals with very large amounts of debt, bankruptcy might be a more cost-effective option. 
  • Tax implications: If you don't qualify as insolvent (i.e., your total debts exceed the value of your assets), the amount forgiven in a debt settlement may be taxed as income. This can add a considerable burden on top of your existing debts.

How to Decide if Debt Settlement Is Right for You: 

Debt settlement is an option for individuals who are struggling to repay their debts. It involves negotiating with creditors to settle a debt for less than what is owed. However, debt settlement is not the right solution for everyone. Here are some factors to consider when deciding if debt settlement is right for you: 

  • Your financial situation: Debt settlement is typically recommended for individuals who have fallen behind on their payments and are facing financial hardship. If you are still able to make your monthly payments, debt settlement may not be the right option for you. 
  • Your debt amount: Debt settlement is usually recommended for individuals with unsecured debts, such as credit card debt, medical bills, and personal loans. If you have secured debts, such as a mortgage or car loan, debt settlement may not be the best solution for you. 
  • Your ability to negotiate: Debt settlement requires negotiation skills and the ability to communicate effectively with creditors. If you are not comfortable negotiating on your own behalf, or if you do not have the time to negotiate, debt settlement may not be the right option for you. 
  • The cost of debt settlement: Debt settlement companies typically charge a fee for their services, which can be a percentage of the settled debt amount. If you are already struggling to pay your debts, the cost of debt settlement may be too high for you.

Why CuraDebt Is The Best Option for Debt Settlement?

CuraDebt is a professional and reputable debt settlement company. The company is licensed and bonded in numerous states and has an A+ rating. CuraDebt's professionalism ensures that clients receive high-quality service and support throughout the debt settlement process. CuraDebt offers a free consultation to clients who are interested in debt settlement services. The consultation allows clients to discuss their financial situation with a debt relief specialist and receive a personalized solution. The free consultation is a great way to get started with debt settlement services and determine if CuraDebt is the right company for you.