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What Is Debt Settlement? Does It Work?


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.

If you are in debt and unsure about what to do, contact an Orange County Bankruptcy Attorney at 1st California Law for a free consultation.

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