Disadvantages of Debt Settlement

Debt settlement offers debtors the opportunity to pay off the balance on their principal for a small percentage of the total owed. The creditor may accept a settlement if one lump-sum payment can be made within a short period of time. Creditors may prefer this option to bankruptcy because it allows them to receive at least a portion of the funds. Debtors may also choose settlement because the process allows them both to begin to restore their credit and to avoid a bankruptcy filing and. In reality, however, only a portion of debtors will benefit from debt settlement negotiations because debt settlement has several disadvantages.

You Must Have the Lump Sum


Many debtors who are in a position to qualify for debt settlement do not have the liquidity to make the necessary payment. If you qualify for a Chapter 7 filing based, it is an indication that bankruptcy may be right for you. Most people who qualify for a Chapter 7 filing do not have the funds available for a lump sum payment. Debt settlement is best suited to those who also qualify for a Chapter 13 bankruptcy, which is similar in nature to a debt settlement process.

You Will Owe Taxes

Any debt that is forgiven by a lender in debt settlement negotiations is taxable income to the IRS. Do the math carefully to see what size payment you will owe at the end of the year. The IRS will not enter into debt settlement talks with you. You will have to pay this sum come April 15th of next year.

Collections Will Not Stop

Bankruptcy filings stop collections attempts immediately. While you are in negotiations, creditors can continue their efforts to collect from you. When you do reach an agreement with any creditor, ensure that you have a signed contract stating all collections attempts will be stopped. Your record will show you have paid in full only after you have deposited the lump sum with your creditor.

You Will Face Credit Problems


Your creditors will only work with you if you owe a large amount of money. If you are only behind on a payment or two, you will not likely qualify; your creditors will have a reason to believe they will still be able to recover those funds in full. Work to make payments immediately to avoid delinquency if you only owe a small amount. Once a creditor is willing to enter debt settlement negotiation with you, your credit will already have suffered tremendously.

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