Debt settlement is a process where you negotiate with your creditors to reduce your debt in exchange for a lump sum payment. It sounds great right? Here are a few reasons why it is not:
- You will need a large sum of money to pay your creditors the payment(s) you negotiated.
- It will damage your credit score because for debt settlement to work, your debts usually have to be in default before your creditors will negotiate.
- There is no guarantee your creditors will negotiate (they might prefer to sue you). Also, credit card companies and collection agencies intentionally make it difficult to negotiate.
- You will be at risk of lawsuits. In the debt settlement process, your accounts remain in default. While your debts are still in default, your creditors can still sue you.
- You will face tax consequences. You will need to report the canceled portion of the debt as taxable income. The IRS considers any amount of forgiven debt as taxable income.
- You have multiple creditors, but only one of them is willing to settle. What will you do about the others who are trying to sue you?
- Many debt settlement companies are scams. Some of the largest debt settlement companies in the nation have been sued for fraudulent business practices and false advertising.