Is Debt Settlement Worth It?

DEBT. Dreaded word. You get money for the now, but end up paying more later.

And the longer you miss payments, the more it costs you. If you can’t keep up with the current payments, what makes you think you’ll be able to handle more debt?

You used that money to pay for something years ago. It may be college, a house, a car. Imagine yourself 20, 30, 40 years later, still paying for a buying decision you made in your twenties.

Do you want that? If not, it’s high time to lower that debt.

Luckily in most cases, debt isn’t as hard to solve as we think:

  • Interest grows slowly
  • If you’re about to default, you can get a loan to cover the debt and win time
  • You can increase the value of your time to pay for it faster
  • You can work on your skills and income streams to pay for it
  • You can ask a familiar to pay it for you. So you now owe to a different person, hopefully with better terms

But if you let it grow, debt can become unmanageable. What if it grows faster than your income, and you’re already working eight hours a day or more? Could it be, that in addition to all of this you were exposed to a personal loan scam?

Debt settlement is a simple answer that could cut your debt in half in a few months. But even though it has a cost, you should still know about it.

Is Debt Settlement Worth It?

Is Debt Settlement Worth It

Disclaimer: it sounds better than it is. Although you can indeed reduce your debt amount, it’s not enough to solve the problem. When you owe more than 50%, you still need a plan to gather that money. And debt settlement isn’t precisely credit-score-friendly.

First things first, settling is about agreeing with the creditor to reduce debt. In the best case scenario, they may forgive 50% of what you owe. Because if you can’t pay it back, it’s still worth more getting something than nothing.

But that assumes you’re the only one who settles your debt. If another company does it instead, that may add up thousands of dollars to pay.

When you settle, you can pay your debt faster, recover financial stability, and get rid of those creditors/collectors.

Here are the risks though:

Interest and late payment fees may keep adding up

Great, the creditor agreed on the settlement, but it’s going to take many months to be effective. What do you do with your debt meanwhile?

  • You can keep with your minimum payments every month. But this money may not be considered for the settled debt. After you pay the new sum in full, all the payments you paid in the past months were for nothing. Then what are you paying for?
  • You can forget about monthly payments and save up for the lump sum. But this increases the debt you just reduced. Because it leads to late-payment fees, more interest, and credit-score hits.

Catch 22? You guessed it. It’s about the option that sounds “less worse.”

Collectors will charge. If you don’t pay, you’re in trouble

You have $10,000 in debt. Then, this company offers to negotiate 50% with the creditor. So they come back with your new debt amount: only $5,000.

That’s the amount you owe to the creditor. You now need to pay the company as well. How much? Usually a 25% of the enrolled amount ($2500), or 25% of the reduced amount ($1250). In any case, you’re paying.

Do you really need an agency, or can you settle debt on your own?

If you do use these companies, it’s better to pay off your creditor first and collection fees last. You get no benefit other than stopping those annoying calls. But collections might have other impacts:

  • They stay in your credit report for years
  • If lenders haven’t rejected you yet, the interest rates you get are prohibitive
  • They might try to sue you for the owed amount. The court might garnish your wages to ensure repayment.

If they wanted, they could charge you in fees the same ammount they forgave you.

Any forgiven ammount could be taxable

That means that, even if they forgive you all the debt, you always owe money to uncle Sam. Even if you didn’t earn it.

If your tax percentage grows with the amount of money owed, then that means more taxes. And if you don’t pay them, they may garnish your wages, freeze bank accounts, or put a lien on your house.

At this point, you should also watch out for any possible fake debt collection letters and debt relief scams.

When Should You Settle Debt?

When Should You Settle Debt

If you don’t have any important purchases in the near future, debt settlement may still be for you. Lowering this ammount may affect your credit score and ability to borrow later.

Before you pay another cent, make sure the creditor has actually agreed to settle. If you have the bad luck to deal with scammers, you will end up paying more than before.

Some of them claim to negotiate your debt, no matter how high it is. So they ask for an upfront fee but never do anything. They don’t negotiate, not even meet the creditor. They then get back to you and say that they’ve fixed everything. “The creditor has settled/forgiven your debt. You don’t need to make any more payments.”

To avoid these situations, be the one who settles the debt. Once another company is involved in it, you’ll owe money to them as well.

If you pay someone to “negotiate” debt, remember that you don’t get the whole discount. If they lower the debt by 50%, you might need to pay 50% of that in fees and taxes. So you lowered your debt by only 25% (50% of 50%).

If you don’t mind having a credit score under 700, debt settlement is almost always a smart choice. Definitely better than filing for bankruptcy, although the process can take several months.

Here are some more actionable and insightful ways on how to get out of debt.

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