Saturday, June 23, 2012

Disadvantages of Debt Settlement

Debt settlement is the process of settling debt by the debtor with the creditor. Upon debt settlement a third party or the debtor himself negotiates with the creditor to repay a reduced debt. The tune of debt reduction goes up to 60 percent of the original debt. With debt settlement there are a lot of options for the debtor to settle a debt. With debt settlement, a debtor gets a reduced amount to repay; all the late fees are waived, it reduces the debtor's APR and provides a time span that is chosen by the debtor to clear the debt. However, all of this still comes with a hard price to be paid by the part of the debtor. For a debtor, there are many disadvantages of debt settlement. Disadvantages of debt settlement are not necessarily true for all. What is a disadvantage for one may not be so for another.

The major disadvantage of debt settlement is the negative credit rating that will be shown on a debtor's credit report. Debt settlement is reported in a person's credit report for 7-10 years. This makes it extremely difficult for the debtor to obtain any credit in this period as many creditors view it very seriously.

Debt settlement is not a good option for people who are just behind by one or two month's payments. Curbing spending and planning expenses better can solve this type of financial crunch. Debt settlement is sought for people who are a minimum six months behind in their payments.

The creditor will put up a lot resistance before agreeing for debt settlement. Going it alone for debt settlement can be very frustrating. The creditor may send harassing letters to the debtor when the possibility of debt settlement arises. The biggest downside of debt settlement is that the debtor may be sued by the creditor and the debtor's wages may be garnished. However, a debtor may only be garnished by one creditor at a time and in some states, the debtor may not be garnished at all. There is a possibility also that the court may direct the debtor to pay the full amount.

Another disadvantage of debt settlement is that the debtor has to show the amount of debt owed after exemption as earnings and has to pay income tax on it. This is one of the most overlooked disadvantages of debt settlement. The creditor would send a 100-c form at the end of the year and the debtor has to report the amount listed as income. Though this factor is overlooked, it cannot be a big problem once exempt from paying a big amount. But combined with other disadvantages of debt settlement like negative credit rating for ten years, the frustrating process of securing a debt settlement and the threat of legal proceedings can present a formidable problem.

People considering debt settlement should weigh all the pros and cons before entering into a debt settlement process. Those desiring to secure a loan for a house, vehicle, or education for the kids should think hard.

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