What are the debt settlement pros and cons? Debt can easily begin to feel like a very heavy weight upon your shoulders. Because of this, there are a number of ways for consumers to settle their debt for less than the total amount owed. Sometimes this is accomplished through a different company that will act on your behalf to negotiate your debt. Often, you can negotiate your debt directly with the creditors themselves. This can be an excellent tool for those that carry crippling debt, but it can also have unintended consequences. While there are debt settlement pros and cons, the following are five examples of when you should look at debt settlement as your best option.
Debt Settlement Pros and Cons: The Options
1. Avoiding Bankruptcy
Of all the ways to eliminate debt, bankruptcy is perhaps the most damaging. Latoya Irby writes for The Balance that even after it disappears from your credit report, many banks and other creditors will ask if you have ever filed for bankruptcy in your life. That will often disqualify you from obtaining credit, even decades after having filed. You may wish to look to debt settlement to avoid filing for bankruptcy. While it will remain on your credit report for a number of years, it isn’t public and doesn’t go through the court process like a bankruptcy. The bankruptcy process is very public and has consequences that never go away. If you are facing this, debt settlement could very well be your best option.
2. Multiple High-Interest Credit Cards
Another type of debt settlement option includes balance transfer credit cards. If you have multiple credit cards with high interest on each, you are spending a lot of money just in debt service rather than paying on the principal amount owed. As Ben Luthi writes in U.S. News & World Report, many of these transfer cards offer low or even zero percent interest during an introductory period. This can be a very attractive option for people looking to pay off their debt completely but may not be able to do so at one time. Be aware that the interest rate will go up considerably after the introductory period, so this may not be the best road to travel if you don’t have a plan worked out for paying the debt. With these types of cards, there are often balance transfer fees, so make sure you read the fine print before you apply for the card.
3. Short Term Hardships
If you are experiencing a financial hardship that is only short term, there are some options for debt settlement that you may want to consider. According to Debt.com, credit card companies are frequently willing to negotiate terms with customers experiencing short term hardships. You will be able to settle debt with these companies to get through the short term hardship in a number of ways. One way is by asking for a temporary payment reduction. They may reduce your minimum payment, or you can ask for a temporary lowering of your interest rate. Neither of these is designed to be permanent, nor are they designed to get you out of debt faster. They are a way to settle debts in a way that will keep you from going into collections and further into debt.
4. Deal Directly with the Credit Card Company
When looking at debt settlement pros and cons, it’s important to know who you are using to settle your debts. It may be a good idea to look into debt settlement if you can deal with the credit card company yourself. While a lot of third party debt settlement companies are out there ready and willing to represent you to consolidate your debt, you should be very cautious. There are lots of hidden fees with many of them and you may end up owing as much and more than before you settled your debts. Truthfully, you can negotiate your debt with your creditors yourself. Credit Karma discusses the ins and outs of working with the company on your own. You should know what options are available before you call and think about what will work best for your situation.
5. Heading to Collections
If you have been sent to collections for your debt, it may be time to look at debt settlement before you get taken to court or are forced to file for bankruptcy. When a credit card company sends your account to collections, that is a sign that they no longer believe in your ability to pay. If you are in a situation where you can settle the debt, the company will definitely be interested in getting something rather than nothing. Whether paying a percentage of what you owe or setting up a workout plan for your balance, setting the debt will be much better than going forward with more drastic actions. Your credit will take a hit, but it could be much worse.
Now that you are clear on debt settlement pros and cons, determine what the best course of action may be the best for your case.