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Debt settlement is a negotiation process where your creditors agree to accept a reduced portion of what you owe them and forgive the rest. It can be a great option for those who are struggling to make their credit card payments. With that said, there are benefits and drawbacks to this approach. This post will explore both the pros and cons of debt settlement. 

What is debt settlement? 

Debt settlement is the process of negotiating a reduced balance of debt owed.   To get the best reduction possible, it’s a good idea to work with a professional debt settlement company that has the experience needed to get your debt reduced quickly and get you the best settlement possible. These experts can help you work through the paperwork, negotiate with creditors on your behalf, and take care of other related tasks such as helping you manage your budget, your savings and your payment terms that will make the process less stressful for you, all around.

How does it work?

Debt settlement works by negotiating with creditors to get them to agree to accept a lower portion of what you owe them, and forgive the remaining amount. There are several reasons you might choose this option to repay your debts—chief among them may be that you end up paying less money than what you initially owed. 

While settlement represents a win for those in debt, it also benefits the creditors who are looking to get back some of the money they’re owed—versus taking on the risk of getting nothing.

Debt Settlement: Risks and Benefits

Just as with other debt-relief options, there are pluses and minuses that go along with debt settlement.

The risks

One risk is that debt settlement can have a temporary negative impact on your credit score, but should bounce back once your debts have been resolved. The dip in credit score is usually worth the long-term benefit of gaining financial freedom. 

The benefits

As we mentioned, the main benefit of debt settlement is that it allows you to settle your debts while paying less than what you originally owed. Settlement can also help you avoid bankruptcy, which is typically only used as a “last resort” as it will negatively impact your credit score and ability to make big purchases for a significant period of time. Working with a debt settlement company could also help you resolve your debts in as little as 24–36 months, which is typically faster than most other debt-relief options.

Is Debt Settlement Worth It?

In many cases, debt settlement makes sense because it can help reduce what you owe, which makes paying it off easier and more affordable. It’s an excellent way of becoming debt-free without paying the total amount you owe. And, as mentioned above, it is typically the most effective debt-relief option. 

Alternatives to Debt Settlement

There are a few alternatives to debt settlement, including debt management and bankruptcy—although these too come with drawbacks. Debt management might not be for you if you have trouble paying your current bills and you want to maintain control over your credit cards.

Bankruptcy, on the other hand, can seem like an attractive option because it could “wipe out” your debt. However, it can also have negative consequences for you, such as being unable to qualify for an apartment, or a home or auto loan. Bankruptcy also stays on your credit report for about 7–10 years, affecting your ability to qualify for financing and purchases for a longer period of time.

If You’re Still Considering Debt Settlement, Why Not Let CreditAssociates Help You Get Out of Debt Today?

The team at  CreditAssociates has over 14 years’ experience and is an industry leader in debt-relief. We have resolved hundreds of millions of dollars in debt for our clients and we can do the same for you. Contact one of our  certified debt consultants for a free consultation  and we’ll work with you to create a personalized debt settlement plan that supports your financial needs and goals.

More Common Debt Settlement Questions

A collection agency keeps calling me. Should I pay them?

When a collection agency contacts you for payment, you’re not required to pay them directly if you’re already engaged in a debt-relief program, like debt settlement. Debt settlement companies handle all of the negotiations, agreements, communications, and payments for your creditors while you’re enrolled in their program. Instead, you should contact your debt-relief company to let them handle this issue.

How much does debt settlement affect your credit score?

When it comes to your credit score, debt settlement will have a negative impact in the short-term.  You will see an initial negative impact on your credit score as negotiations take place, but you should ultimately see positive effects as your debts are settled and resolved. 

What is the difference between Debt Settlement and Debt Consolidation?

The primary difference between debt settlement and debt consolidation is that debt settlement is geared toward lowering the total amount you owe, while debt consolidation is a means of combining your debts into a single loan (with interest).

What are the negative effects of debt settlement?

The main adverse effect of debt settlement is that it’s possible that your creditors may choose not to accept a settlement offer. This is a reason why it is important to let an expert debt settlement company handle this process for you. Their experience and focus on settling your debt for less than what you owe will help put you in a better position to reduce your debt and gain financial freedom.

Is it better to pay off a debt or settle?

When comparing whether to pay off your debt or settle, it depends on your current situation. If you have the funds available to pay off your debt, then that might be the most straightforward process. But if you’re struggling to pay off credit card debt then settling might be the better option.

How long does it take to improve my credit score after debt settlement?

After enrolling in a debt settlement program, you will see an initial negative impact on your credit score as negotiations take place. However, you’ll ultimately see positive effects as your debts are settled and resolved.