Debt settlement is not for everyone. While for some it may be the best option for handling rising debt problems, for others it could be problematic. Since the industry is largely unregulated, pursuing debt settlement can be risky. However, for some, it can be worth considering.
For those struggling to avoid bankruptcy and foreclosure, debt settlement can be a way out. Commonly confused with debt consolidation, debt settlement does not offer borrowers one large loan to pay off smaller debts. Instead, debt settlement companies generally advise their clients to stop paying bills and start saving cash, in order to better negotiate settlements. Such settlements often involve paying less money to cover large debts.
While this can be a great option for some, there are some risks involved. First and foremost, there is a chance of fraud. As the debt settlement industry is mostly unregulated, there is always a chance that a company offering debt settlement services could, in actuality, be a scam. In other cases, a company may not be deliberately deceitful, but rather simply incapable of negotiating effective deals on the borrower’s behalf. It is therefore very important to research companies before committing to one.
Debt settlement could also damage the borrower’s credit score. Failure to pay bills on time will severely hurt existing credit ratings, and settling a debt for less than is owed can do further damage.
It is also incredibly important to remember that the IRS generally levies a tax against the difference between the amount owed and what the borrower actually pays in a settlement. For those within the 25 percent federal tax bracket, the tax on forgiven debt can be considerable.
Lastly, those interested in debt settlement should remember that, in any case, the matter will not be solved overnight. While some cases may be settled in under a year, most instances can take closer to two years.