If you’re in debt, you’ve most likely considered a debt settlement program as your way out of debt. This is because of the potential amount of money you will save.
However, while debt settlement can save you money by allowing you to resolve your debt for far less than you owe, it can cause some adverse effects on your credit score. Below are a few risks of debt settlement.
Creditors may not agree to settle
Most creditors may not agree to settle your outstanding debt, and those that agree may decline to work with a debt settlement company. Worse, if you fail to keep up with your payments, your creditors may pursue legal action against you, which will cost you more money and do more harm to your credit.
You may end up with more debt
Once you agree to use a debt settlement service, you may end up paying interest or late fees. You may also face lawsuits filed by debt collectors or creditors. In addition, the amount forgiven can be taxed, which means you will have to pay tax on it.
Your credit score may be damaged
Repaying your debt through the settlement process can harm your credit score, especially if your debt settlement program requires that you stop making payments during negotiations. Remember, creditors may not negotiate with people who can keep up with payments. However, not paying your debt promptly will damage your credit.
Your funds may be held
A debt settlement provider may require you to pay a substantial amount for repayment to your creditors, which they hold for months or even years as they negotiate with your creditors. However, if you decide to get out of the program, the provider may refuse to return the money if you signed documents that gave them the rights to it.
Debt settlement may seem like an inexpensive way to get out of debt. However, you may face the above risks. To ensure you’re making the right decision, seek credit counseling and legal guidance so you understand your options.