Debt settlement is worth it when a fair settlement can be reached quickly, allowing the borrower to satisfy their obligation for less than the full amount due by making a lump-sum payment that they can comfortably afford. It’s best if the borrower does not need a good credit score for anything important, such as a mortgage application, in the months that follow, either. But debt settlement involves an enormous amount of risk. There’s the risk that creditors won’t agree to a settlement, since they have no obligation to settle. There’s also the risk that they’ll sue the debt holder for payment.... read full answer
Only about 10% of debt settlement cases are successful. When a settlement can’t be reached, debt holders are still responsible for the entire debt, unless they pursue an option like bankruptcy. There are a few scenarios in which debt settlement may make sense and therefore be worth it, however.
When Debt Settlement Could Be Worth It:
When you’ve explored your options through credit counseling. If you’ve explored all your options for debt resolution through credit counseling and feel debt settlement is your best option, it could be worth it. A counselor at a credit counseling agency can use your financial documentation to present you options and develop a debt management plan. Since the initial consultation at a credit counseling agency is generally free, you really have nothing to lose.
These debt management plans are generally preferable to debt settlement, as they do less damage to your credit. An important exception is when you can’t afford the monthly payment under the plan. If that’s the case, debt settlement might be the better route to take.
When you’ve already missed payments. If you’ve missed payments, debt settlement could be worth it. You’ve essentially started the debt settlement process by allowing your accounts to become delinquent. It’s not wise to stop payments intentionally, as this lowers your credit score, but settlement could be a way to make the best of such a situation.
When the math makes sense. If you can save more in debt forgiveness than you spend in fees and taxes, debt settlement could be worth it. If you use a debt settlement company to negotiate with your creditors, make sure you have a clear understanding of their fee structure. Once you know how much of your debt will be forgiven, you can also estimate how much federal tax you might owe based on this portion.
When you have enough money to settle. If you have enough money to make an attractive settlement offer, debt settlement could be worth it. Since creditors have no obligation to settle, they will be more likely to agree to a settlement when you have enough cash on hand for a lump-sum payment.
When speed of resolution matters. If resolving debt fast is an important factor, debt settlement may be worth it. When comparing it to debt management and Chapter 13 bankruptcy, you can save at least a year when you pursue debt settlement. It’s important to note that Chapter 7 bankruptcy can resolve debt problems in 3-6 months, so debt settlement is less favorable in that matchup.
When you don’t mind damage to credit. If you don’t mind damage to your credit, debt settlement may be worth it. Credit damage is inevitable with debt settlement, first as a result of missed payments, and ultimately through the reflection of a settlement in your credit history. If credit damage does not faze you, debt settlement could make sense as a means to resolve your debt.
Debt settlement is worth it when the risks and rewards align with your priorities. The process of debt settlement will send your credit into a nosedive and ruin your relationship with your creditors. You also risk getting sued and the creditor refusing to settle. On the other hand, you could potentially resolve your debt problems by paying a fraction of the amount owed. Compared to debt management, you could save years in time and thousands in cash. It all comes down to your circumstances.show less