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Debt Settlement Pros and Cons

When you hear about the claims and promises made by some debt settlement companies, it's wise to consider both the pros and cons of debt settlement. The promise of settling your debts fast may be nearly impossible to resist, especially if you have been hit hard by the economy. The advertisements are everywhere - on TV, on the radio, and of course, on the Internet - and they all make the debt settlement process sound so painless and risk-free. Except, it isn't.

Like all other debt reduction methods, the process of settling your debts can be fraught with difficulties and consequences, and there is no foolproof program out there. If you are considering signing up for any debt relief program - whether it's debt settlement, consolidation, or even bankruptcy, it's truly worth your while to learn about each program's pros and cons. Because when money is already tight and your bills have become insurmountable, the last thing you need are scam artists with their eyes set on your hard-earned money.

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Pros of Debt Settlement

One of the pros of entering into a debt settlement program (a.k.a. debt negotiation) is that it has been proven effective in helping some consumers wipe out their debts. Under a debt settlement program, credit card companies will agree to "forgive" or "settle" your debt for a drastically lesser amount than what you owed. Debt settlement companies often will advise their clients to stop paying their bills and instead save up cash that is used to negotiate a one-time, lump payment (the settlement). Another "pro" to consider: Some creditors, once they settle, may agree to bring your account to a current status, which can help improve your credit score almost immediately. In addition, once you settle your debts, you can finally put an end to those harassing collection calls.

You'd be surprised at how prevalent debt settlement is these days, but in fact, numerous companies are willing to negotiate with consumers who truly are facing extreme financial hardships. Many creditors just don't like to advertise debt settlement because they will essentially be settling for a lesser amount than what you originally owed. But consider this: If credit card companies decide to "sell off" what's considered "bad debt" - or the amount they are likely not going to be able to collect from you - to a third-party debt collector, they will often receive as little as 10 cents on the dollar. And if you decide to file personal bankruptcy, they will not get paid at all.

However, if those creditors receive a reasonable offer to settle from you, they are likely to agree to settle your debt instead. If you are interested in learning more about your debt reduction options, we can provide you with more information about reputable companies and services, and get you in touch with experts in the field.

Pro or Con - Debt Settlement Risks

Of course, it goes without saying that it's very important that you learn of the potential risks of settling your debts. The fees, for one, can be very steep. Some debt settlement companies may demand 14 to 18 percent of the total value of the debt you want settled, while others may charge a percentage of the debt savings once you settle.

New Consumer Protections

The good news is: the federal government has made steps to protect consumers like you against shady debt settlement companies that charge outrageous upfront fees and make false promises to those who are most vulnerable. Today, a federal law prohibits companies from collecting upfront fees. Previously, these debt settlement firms were able to collect thousands of dollars in fees without following up on their promises.

Now, these companies can only charge a fee after it has successfully settled, or reduced, at least one of their client's debts. The law also dictates that fees must be spelled out in written agreements between the consumer and creditors. In addition, the new regulation requires settlement companies to make full disclosures to potential clients about the potential negative impacts of a settlement.

Another con of settling your debts: it can harm your credit, sometimes as dramatically as bankruptcy. Negative marks may continue to hit your credit score until creditors get their settlement - which means your credit will continue to suffer while you save up money to negotiate the settlement.

Some creditors, once they know you are working with a debt settlement company, may even send threatening letters and sue you. Consider that with bankruptcy, your creditors will stop their collection efforts as soon as you file. Not so with debt settlement.

Another secret that debt settlement companies might not be so forthcoming with you is that the Internal Revenue Service might consider forgiven debt to be taxable income. In some cases, that amount can push some people back deeper into debt simply because they did not consider the tax consequences.

Deciding on Debt Settlement

Despite of the potential drawbacks of debt settlement programs, many consumers still consider it a viable option because they are truly burdened by a tremendous amount of unpaid bills and are willing to pay for whatever reduced amount they can settle with their creditors. Debt settlement can be a good option for you too - provided you know of its pros and cons, and if you find a reputable company that has a track record of helping other consumers resolve their credit card and other debts.

But no matter which method of debt reduction you choose - whether it's signing up for a debt management plan, debt settlement, or even bankruptcy - it pays to be an informed consumer. We can help you explore all your debt relief options, and give you all the information you need so that you can finally stop worrying and tackle your debts once and for all.

Answer a few questions online to get a free debt relief evaluation and savings estimate.

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