Pros and Cons of Taking a Settlement on an Old Debt

Debt settlement is often times mistaken for debt consolidation. The two are used interchangeably where they are in reality, very different. A debt settlement, is calling a specific company you are in debt to and offering to pay them off in one lump sum that is lower than what is owed. Debt consolidation, however, is gathering all of the debt you owe at multiple companies and paying them off with one larger loan with only one creditor. 

On the surface, it seems that a debt settlement appears to be the best option, because the consumer would only be paying off a portion of the debt owed! However, there are very real pros and cons for taking a debt settlement on an old debt. 

Pros of Debt Settlements:

Let’s start with some of the benefits of taking a debt settlement; after all, pros are more fun anyway:

• Borrowers pay only 20-30% of the total debt owed to a company (sometimes even less than that!)
• Debt is paid off faster than with a traditional debt consolidation approach
• Debt settlement provides an alternative to bankruptcy 

The cons of debt settlement are very real as well. The few outlined below can be summed up like this: high risk, high reward. When you are pursuing debt settlement as an option to get rid of old debt, you are essentially, betting that the creditors are going to accept your offer of settlement. 

Weighing Your Options:

Yes, there can be great benefits if accepted, as mentioned above like paying off debt much faster, and even paying off less of the balance- but for many, the cons outweigh the pros in debt settlement.  For this reason, many turn to an attorney, or professional debt settlement company to help them settle their debt. It can be overwhelming to attempt to negotiate with creditors directly. Having a professional negotiate on your behalf can be beneficial if you aren’t confident in your negotiation skills or are concerned about the process in general. 

Similarly, while debt settlement often times appears to be a faster solution to getting rid of outstanding debt, the reality is, it can often take 2-3 years to settle debt. During this time, late fees and penalties do not stop. In addition to fees accrued directly by creditors, you may be subject to tax penalties as well. So, debt settlement is something that should be discussed with your tax advisor before beginning as well. 

Cons of Debt Settlements:

Here are some general cons of debt settlement if this is a path you are considering to eliminate old debt: 

• Additional fees and penalties
• Tax penalties
• Credit score impact (reported only as settled, not paid in full.)
• Addresses only one debt at a time
• Requires additional capital up front
• More time intensive for negotiations with creditors
• Creditors can refuse your settlement offers

To truly understand the best way to eliminate old debt is best for you, it requires a complete financial check up. This means a holistic look at your finances. For example- if you have money saved up and can afford a large payment and have only one or two creditors to pay off- then a debt settlement option may be best for you. However, if you have multiple debts to pay off and no money saved to make a large payment up front, debt consolidation may work better. 

Additionally, considering the impact a debt settlement would have to your credit report is extremely important. Do you have time to wait for your credit report to recover after a debt settlement lowers your credit? Are you planning on applying for credit soon? These are just a few questions to ask yourself when considering the pros and cons of debt settlement and what path would be right for you and your financial future.