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Possible Negative Side Effects of Debt Settlement

While debt settlement has its obvious appeal and is a good option for people with the right circumstances, it still has some negative effects to it. Before jumping in, you should keep in mind the possible negative effects of settling debts.

Here are some of the important negative effects that debt settlement can bring in your financial life.

It Could Hurt Your Credit Score:

Most people who end up going the debt settlement route probably already have negative feedback on their credit history/score from delinquent and/or late payments. Because of that, going the settlement route probably won’t hurt your score much – at least compared to the alternative. But, if you still have a good credit score, you may want to consider the other solutions to dealing with debt. Best to search for debt relief programs that will not tarnish your score because debt settlement will influence your credit score.

It Could Bring On A Lawsuit From Creditors:

While it’s not a common practice, sometimes creditors push through with their threat to sue debtors. You cannot erase the risk that this can happen. This usually happens when a debtor (or someone on their behalf) starts to talk to creditors about settlement. This doesn’t happen that often largely because of the high legal and court costs for the creditors and the risk that the debtor will just file for bankruptcy anyway before a judgment can be claimed. In bankruptcy, the chances of the creditor not getting anything is more likely to happen.

Settled Debts Must Be Claimed As Income For That Tax Year:

Any forgiven debt that is more than $600 is perceived as taxable income. That means you need to pay a certain amount of tax for the amount that you will save on debt settlement. For example, if you have $20,000 in debt and make a settlement agreement to pay back $12,000, then you’ll have to pay income tax on the settled amount of $8,000. Depending on what tax bracket you’re in, settlement might not save you as much as you’d think because of the tax liability. This is why you need to make the necessary computations to ensure that this debt solution will end up giving you the savings that your financial condition requires.

Settlement Company Fees Can Be High:

Depending on the settlement company, some of the associated fees can get quite high. The FTC (Federal Trade Commission) recommends using a settlement company that is a member of TASC (The Association of Settlement Companies) and a member of the BBB (Better Business Bureau), as companies participating in these kinds of programs tend to be better then companies not part of them. Some companies will charge you around 25% of the debt that you will enroll with them. Make sure that if you opt to use professionals in debt settlement, the charges and fees will be discussed immediately. Hidden charges are strictly prohibited by the law.

Consider all of these negative effects and gauge if debt settlement is really the right option for you. It has its rewards, that is for sure, but you need to think about your financial goals too. If you can manage to grow your income, it might serve you better to opt for debt consolidation instead. Or if your financial condition is so severe and there is no hope of it improving in the near future, just plunge into bankruptcy. The credit implications may be very damaging but it can be rebuilt anyway.

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