Finance
Pros and Cons of Debt Settlement

When a borrower defaults on their loan or credit card balance, everyone loses. The borrower sees their credit score sustain serious damage and has to deal with the stress of collection calls during the delinquency period — and may even have to declare bankruptcy if the inability to pay stretches on too long, potentially losing some of their assets.
In the case of default, the lender can end up getting little to no payment. This makes it worthwhile for both sides to figure out a solution in which some payment is made within a reasonable timeframe.
Debt settlement is the negotiation process by which borrowers in debt and creditors are sometimes able to work out agreements in which a percentage of the original balance satisfies the debt. This is a strategy borrowers can pursue on their own or through a dedicated program.
As is the case with all debt relief strategies, there are both debt settlement pros and cons to consider.
Debt Settlement Pros
What are the possible advantages of pursuing debt settlement?
Possibly reducing your balances
The primary goal, and the leading reason to consider debt settlement as a potential solution, is reducing how much you owe. While some other debt relief solutions chip away at interest charges and late fees, settlement aims to directly lower the principal balance itself.
Depending on the amount of the debt in question and the willingness of the creditor to negotiate, consumers may be able to save hundreds or thousands of dollars here — making debt repayment much more manageable than at the full sticker price, so to speak.
Avoiding bankruptcy
Bankruptcy is generally regarded as a last-ditch effort. Chapter 7 bankruptcy can require borrowers to liquidate certain assets and can stay on a credit report for up to a decade. Chapter 13 bankruptcy requires partial or full repayment of debt over the course of years and can stay on a credit report for up to seven years.
Filing for bankruptcy may also necessitate hiring an attorney, which can lead to more fees.
Debt Settlement Cons
So, then, what are the possible drawbacks of pursuing debt settlement?
Can take years to complete
Settlement is certainly no get-out-of-debt quick card. It often takes two to four years to complete the process, depending on the size and number of Debt Collectors to be settled — as well as the amount you’re able to save each month to utilize in negotiations.
Whether you enter into a settlement program or attempt to negotiate on your own, you’ll need to have the funds ready to hold up your end of the bargain. For many borrowers this means months or years of saving.
Can hurt your credit score
If saving requires you to divert your funds away from making payments, your credit score will reflect late payments. Since payment history makes up about one-third of your credit score, skipping any payments can bring down your credit score.
Borrowers who have already seen their credit score tarnished by unmanageable debt levels may deem it worth it to take the hit brought on by settlement, then focus on rebuilding their score in the aftermath.
Doesn’t always work
As is the case with all debt relief tactics, there’s no guarantee settlement will work for every debt. Some creditors are more willing to negotiate than others. Any company issuing a guarantee of certain results is exaggerating, as there are too many factors at play to promise success for every borrower, every time.
Weighing the pros and cons of debt settlement can help you decide whether it may be a good fit for your needs — and will help you make an informed decision.