What are the pros and cons of debt settlement?

The biggest pros of debt settlement are reducing the balance owed and avoiding bankruptcy. The biggest cons of debt settlement are credit score damage, the risk of creditors refusing to settle, and the threat of a lawsuit. In most cases, the cons of debt settlement outweigh the pros. The risks that come with debt settlement are incredibly high, and even if they can be avoided, the chances of a successful settlement are about 10%.

Alternatives to debt settlement can offer huge advantages. For example, bankruptcy can provide debt relief faster and debt management can resolve debt with less credit-score damage. An important exception is when the debt holder cannot afford either debt management’s monthly payments or the filing fees to begin bankruptcy. In this situation, debt settlement may be the only option.

To help determine whether the advantages outweigh the disadvantages in your case, check out the typical pros and cons of debt settlement listed below.

Debt Settlement Pros:

• You reduce your balance owed
• Debt resolved faster than with debt management
• Calls and notices from collections stop after settlement
• You avoid the stigma of bankruptcy

Debt Settlement Cons

• Drop in credit score (up to 100 points)
• You need enough cash on hand for a settlement payment
• Only available for unsecured debt
• You pay tax on the forgiven portion of debt
• Risk of lawsuit
• Creditors might not settle
• Settlement stays on credit history for 7 years
• Calls and notices from collections increase (during process)
• You pay fees to debt settlement companies (if using one)

It’s clear that debt settlement has significant pros and cons. If you’ve already missed payments and can’t afford to make any more, debt settlement can offer a substantial advantage over other means of mitigating financial hardship. You only have to pay a portion of your balance owed and, eventually, your credit will rebound. On the other hand, debt settlement involves substantial risk. There’s the risk that your creditor won’t settle, since they have no obligation to do so. You could also face litigation.

If you want to protect your credit in the short term and avoid these risks, debt settlement is not a good idea. You’ll be better off working with your creditors to set up a revised payment plan. But no matter which option you choose, make sure to always do the math and weigh your risks.