When you’re caught in financial strife, you may feel overwhelmed and desperate for solutions to manage your mounting debt burden. Debt settlement is one way to negotiate with creditors to pay less than you owe.
While debt settlement may seem like a great option, it is important to understand some of the risks associated with this approach. This could help you determine if it is truly the right choice for your financial situation.
Risk of credit line closure
The credit industry views debt settlement as a risk indicator, often leading to immediate account closures. When you settle your debt, creditors may decide to terminate your credit relationship entirely. This can significantly affect your ability to make routine transactions that often require credit cards, from online purchases to travel arrangements.
Possible tax consequences
Debt forgiveness through settlement creates an unexpected tax obligation that many people don’t anticipate. The IRS may treat the forgiven debt as taxable income, requiring you to pay taxes on the amount that was written off. This can result in an unexpected tax bill just when you’re trying to regain your financial footing.
Substantial finances required
Pursuing debt settlement requires significant financial preparation. Most creditors expect a substantial portion of the debt to be paid in lump sum. Whether working directly with creditors or through a settlement company, you’ll need to accumulate enough savings to make meaningful settlement offers while potentially still struggling with your current financial situation.
Damaged credit score
Debt settlement leaves a lasting mark on your credit history that can impact your financial opportunities for years to come. The settled status appears on your credit report for an extended period, signaling to future lenders that you didn’t fulfill your original payment obligations. This can result in declined applications or higher interest rates on future credit.
If you are considering the debt settlement approach, it is important to seek legal guidance to understand how it may affect your specific financial situation and what alternatives might better serve your needs.
