If you are facing financial hardship for the multiple numbers of unpaid credit bills, you can take help of debt settlement. You have to negotiate with your creditors to reduce your outstanding debt balance, as per your affordability.

What debt settlement is

In order to reduce your outstanding debts, you have to negotiate with your creditors. This process of debt reduction is called debt settlement. You can do the negotiation on your own or can take help from any professionals.

You need to go to debt settlement companies and they will negotiate with your creditors, on your behalf. Your outstanding debt may get reduced by 40% to 60%. But, you have to pay taxes to the IRS for the forgiven portion of your debt, if the forgiven amount exceeds $600. Each month you have to deposit a fixed payment to your settlement company. When the amount will accumulate into a lump sum, your settlement company will pay your creditors. However, once you enroll in a debt settlement program, it will have an adverse effect on your credit score.

Eligibility criteria for debt settlement

If you meet the criteria mentioned below, you can be eligible for a settlement program:

• You need to have a minimum of $10,000 in unsecured debts

• You have exceeded the limit on your credit cards

• You don’t have the ability to make more than the minimum monthly payment

However, prior to opting for a debt settlement program, you should know the pros and cons of it.

Benefits of a settlement program

Some advantages of debt settlement are:

• Single payment: You can make a single payment each month to the settlement company, instead of paying multiple bills to your creditors.

• Avoid bankruptcy: If you have no other option of paying your creditors and thinking of declaring yourself bankrupt, going for a settlement would be a very good option. Though in both the cases your credit score will get lowered, debt settlement will have less adverse effect on your credit score than bankruptcy.

• End of harassment: Once you opt for debt settlement, all harassment calls from your creditors will come to an end. If any creditor tries to harass you, you can take legal action against him.

Downsides of a settlement program

Some of the disadvantages of a settlement program are:

• Negative credit score: Your creditors will get paid when the monthly deposited amounts will accumulate into a lump sum. These late payments will lower your credit score and will stay in your credit report for up to 7 years.

• Pay taxes:  You will have to pay taxes to the IRS for the forgiven portion of your debt.

• Upfront fees: You have to pay hefty upfront fees to the settlement company for their service. Often the companies take their fees from your payments first, without paying the creditors. Thus, your debt keeps rising.

Prior to opting for a debt settlement program you should weigh the pros and cons of it and find out whether it can really make you free from your financial obligations.

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