Debt settlement is a service that can help individuals reduce debt by negotiating structured and lump-sum settlements with your creditors. Debt settlement can be a very important way to get out of debt for those who cannot afford monthly payments, have experienced a financial hardship, or want to avoid bankruptcy. However, there are risks you need to be aware of before signing up for a debt settlement program. As such, it’s important to know the exhaustive list of pros and cons to help you make the most informed decision as to which approach is best for you.
How Debt Settlement Works:
Debt settlement companies which also can be referred to as “debt relief” companies work as an intermediary between the consumer and the creditor. The debt settlement company will do the following:
- Set up an enrollee owned escrow bank account for the enrollee to consolidate all of the payments into one payment for the creditors.
- Communicate to the creditors to be the primary point of contact going forward to prevent future calls to the enrollee.
- Negotiate on behalf of the enrollee with each of the creditors for the lowest possible rate. Get agreement from the enrollee on whether to accept the settlement and payment plan.
- Repeat step 3 for all creditors. Manage the payments to all creditors upon completion and debt freedom.
When choosing a debt settlement company, it’s important to review the fees charged and compare those with other companies. You should also consider whether the debt relief company you are considering is legitimate. Additionally, how the fees are paid and any other fees associated with the program. It’s also important to understand who you will be working with during the program. For example, Ascend pairs each individual with an advisor for the duration of the program.
Debt Settlement Pros and Cons:
The list of Debt Settlement pros and cons below is from perceived highest importance to lowest importance. Please see the tables below that also can be found in our ultimate guide to debt settlement.
Debt Settlement Pros
|Debt Settlement Pros||Explanation||Importance|
|Savings||You often pay less than owed. The savings vary by creditor, but the savings can be 50% or higher.||High|
|Payment Flexibility||You have more flexibility to set the amount for your escrow account each month than a bankruptcy or a loan.||High|
|Time||Debt settlement programs can produce debt freedom much faster than making minimum payments or pursuing a consolidation loan.||Medium|
|Avoid Bankruptcy||Debt settlement can be a great alternative to bankruptcy in certain situations.||Medium|
|Financing Flexibility||You may have access to credit or. a loan faster with debt settlement than bankruptcy.||Medium|
|Accountability||Canceling your credit cards in debt settlement can act as accountability.||Low|
Debt Settlement Cons
|Debt Settlement Cons||Explanation||Importance|
|Credit Score and Credit Report||Your credit score will often be negatively impacted during the program, so the question is whether getting out of debt is more important than your temporary credit score. Your credit report will also show that you settled your debt which can have adverse effects.||High|
|Creditor Lawsuit||Creditors may file a lawsuit.||High|
|Late Fees and Interest||The debt owed at negotiation is often higher, so negotiations are on a higher amount.||Medium|
|Creditor May Not Work With You||Creditors may not accept settlement offers to settle debt. Ascend has data to help determine likelihood of settlement at enrollment, but creditors policies and procedures may change.||Medium|
|Potential Taxes on Forgiven Debt||Forgiven debt may be taxable if the individual is solvent. Often, many individuals can qualify for technical insolvency, but that does not apply to everyone.||Medium|
|More Expensive than Chapter 7 Bankruptcy||Debt settlement often costs more than a Chapter 7 bankruptcy and potentially a Chapter 13 bankruptcy.||Low|
Debt Settlement Alternatives:
There are many different alternatives to debt debt settlement, such as utilizing a debt management firm, settling debt on your own, or a credit counseling agency.
Additionally, a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy is also a legitimate alternative to debt settlement. You may consider comparing debt settlement vs bankruptcy. Each have it’s own set of pros and cons, so we created a table below to help you understand the pros and cons.
|Attribute||Debt Settlement||Chapter 7 Bankruptcy||Chapter 13 Bankruptcy|
|Damage to Credit Report||Medium (7 Years, No Bankruptcy)||Highest (10 Years)||High (7 Years – No Credit During)|
|Damage to Credit Score||Medium||High||High|
|Time||2-4 Years||90 Days||3-5 Years|
|On Public Record||No||Yes||Yes|
|Taxes on unpaid debt||Potentially (>$600)||No||No|
|Fees||20-25% of Enrolled Debt (Ascend = 15%)||$500-$2000||$2500-$6000|
|Success Rate||Low to Medium||High||Low to Medium|
Is Debt Settlement Right For You?
This depends on your situation. At Ascend, we would prefer to review information specific to you to determine what’s best for you. To do this, we built a debt settlement comparison calculator that allows you to understand payments and fees, pros and cons, etc. For example, through this calculator, you can estimate your Chapter 13 repayment plan if you are considering aChapter 13 bankruptcy. We need to know your exact situation before making a specific recommendation. We consider debt settlement as a viable option for some, but not for everyone.