There can be some very damaging on the overall health of your finances if you are considering debt settlement. There are some very damaging and negative effects of debt settlement.
The idea to solve your debts through debt settlement isn’t going to be easy; it can be very difficult and daunting prospect. This is why there are companies that are specializing in this type of debt settlement.
Debt settlement is about not paying your bills, bringing your case to the forefront of your creditors mind. You are stating by not paying that you are in a financial situation and you want help. The debt settlement is then agreeing with your creditors that you are only going to pay off a percentage of the debt that you owe and no more. This is the negative effect of debt settlement you are not going to pay the whole debt.
The Negative Effect of Debt Settlement
You might think that debt settlement is the way forward but you need to fully understand what you are planning on doing before you embark on this course of action.
One of the negative effects of debt settlement is the damage that it will do to your credit rating. It will not make it look poor for a short period; it will do serious damage for a number of years. It is the second worst thing that you can do to your credit rating, the first is bankruptcy. There are two reasons for this:
- You are not paying your monthly commitments so it shows accounts are in default. This means that you have not paid your bills and you are behind in the payments.
- You are increasing the debt with late payment fees and interest.
Both of these add up to a significant proportion of what is calculated when your credit report is created.
There are some pitfalls that you need to be prepared for if you are not put off by the negative effect of debt settlement.
- The companies can prolong the time that it takes to form a settlement figure. This means that more interest and late payment fees are added. During this time you are not even allowed to make minimum payments. If you have a company working for you this can be made to go quicker because they will have a standing in the financial world and the settlement is often reached in a short period of time.
- With the figure of money that you owe increasing every month, this could put the figure of settlement higher. There is no guarantee that the figure is going to be in the region that you are hoping for.
- You will be pestered by calls from your creditors asking for money and payment. This pressure can be eased if you are dealing with a debt settlement company; they get the calls and not you. If you do try to do this by yourself the calls are known to be nasty and threatening.
- If the debt that you get forgiven is more than $600 then you will need to think of the tax implication. This money will be seen as an income and you can be liable for taxes.
- The debt will not be marked on your credit report as paid or even paid in full, it will have the terms ‘paid-settled’ or ‘charged – off settled’. These are clear indicators that you have used the debt settlement option and can have a negative impact on your credit file for the next seven years.
Debt Settlement Might Be the Best Option If
- It might be the only option to try before going bankrupt. It is important to try all options because bankruptcy is not an easy situation to rise from.
- If you do not plan to use credit in the near future and therefore have no care about your credit score then this might be a great option.
- If you have tried to consolidate your debts and you either couldn’t make it work or you were refused any consolidation loans then this might be one of your last options to try.
- If the debt that you owe is a lot then this might be the only way that you are able to be debt free in five years’ time. This will give you time to rebuild your credit file in the future.
- If you need to resolve your debt problem fast and are fully aware of the consequences then this option could be for you.
It is important that before you look towards debt settlement that you fully understand what you are going into before you start the process, because it is not going to be easy and it will have implications for a long period of time. It is therefore vital that you only proceed with all the information possible.