If you’re like most Americans, you have a bunch of debt. Whether it was from medical bills, failed businesses, or just plain old-fashioned poor choices, the struggle is real and it won’t go away on its own. When the bills get too big, one of your options may be debt settlement. We’re not gonna lie, it’s not good. But it might be better than the alternative. Maybe. Either way, it’s best to be informed if you’re facing this decision!
Here are Five Fast Facts on debt settlement:
- 🤝 What Is It? Debt settlement is the process of negotiating with your creditors to pay back some of your existing balance. They’d rather get some of your money than none of it, so they’re often willing to reduce the amount owed if you set it up with them. You can use a third party company or do it yourself. Would you rather humble yourself or have someone else do it?
- 💰 What Does It Cost You? A lot, actually. If you use a third party company, they will charge you fees for their services, often around 15-25% of your balance (the total balance, not the negotiated settlement amount). Also, the debt that is forgiven is considered income by the IRS, so you’ll get hit by that on your next year’s taxes. Of course you will…thank you, IRS.
- 😖 How Does It Impact You In The Future? Your credit will be torched. In order to start settlement negotiations, you’ll have to stop making payments (or maybe you already have), so your credit report will see this as big time red flags. Having accounts in settlement will also reflect negatively on your credit. This will impact your ability to get financing on future purchases, drive up the interest rate you get on loans (if you can get approved at all), and so on. Once you pay it all off, your credit will eventually recover, but it’ll take time.
- 🧓 How Long Is The Process? The settlement process itself could take several years, depending on how much debt you’re trying to settle. Once you’ve paid off everything and come out the other side, the red flags on your account from missed payments and settlement could still remain on your credit for another seven years. It’s like a decade-long vacation from financial peace!
- 😲 No Thanks, What Else Can I Do? There are other options. You could first try credit counseling, debt consolidation, or balance transfers, all of which are less painful and costly. Bankruptcy is another option, but it’s usually going to be worse than settlement.
🔥Bottom line: Debt settlement is not a fun or quick process. It may be necessary, and you can come out of it better off in the long term…but it’s definitely not for the faint of heart! And you’d better plan for how you’ll get by during those years of paying things off and having your credit recover, not to mention change any potential bad spending habits that got you into the mess in the first place. If you take this path, make sure you understand all the fine print so you can avoid things like late fees and pay-up-front scams. And not all companies will even allow debt settlement, so be sure it’s an option you can consider rather than make assumptions and then be surprised.
Do you know anyone with experience going through debt settlement?
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