Debt Settlement – What Are The Risks?

photo credit heartleader.com

Like every other debt relief option, debt settlement carries with it some significant risks and potential benefits for the consumer. Settlement is not an option that the creditor would prefer – they would like to recover the full amount of money they are owed. For that reason, debt settlement may be a daunting task for the consumer.  Some of the risks associated with debt settlement you may want to consider:

• The creditor may be resistant to settlement and may be difficult to deal with.
• The creditor may in certain cases file a lawsuit to attempt to collect on the full amount owed.
• The majority of debt settlement providers will charge fees for their services which will impact the actual amount you save on the debt that is forgiven.
• The credit score of the individual settling the debt may be impacted negatively in the process.  This could affect future interest rates, availability of credit, employment prospects and more.
• There may be tax implications for the amount saved on the debt. While you may not pay the full amount owed to the creditor, you could be held liable for the tax on the amount saved in the settlement process.
• Settling the debt may be a lengthy process that takes time, effort and vigilance on the part of the consumer while the details are worked out and the amount agreed on in the settlement is accumulated to satisfy the debt.
• The settled debt may appear on your credit report as “settled” rather than “paid in full” or “paid as agreed” which could hinder the ability to obtain credit from a new source later . Creditors may not like to see “settled”.

The bottom line is that it’s important to know what you are signing up for and what the long-term impact will be when considering debt settlement as an option. Make sure that you have done your homework and are dealing with a reputable company who will not take advantage of your situation.