Be sure to consider debt settlement’s pros and cons before deciding to settle your credit card debt! One option to reduce debt seems to be gaining increased attention and interest among people burdened by credit card debt today.  This method is debt settlement, which is also commonly referred to as debt negotiation.

The increased attention towards this mysterious method of debt reduction is due to many factors.  Increased marketing efforts both online and off, seemingly extraordinary promises, and controversial coverage all seem to contribute to the buzz.

So for all of you readers wanting to learn about settlement, today is your lucky day.

What is Debt Settlement?

Debt settlement refers to negotiating with your creditors and paying less than the total balance that you owe to eliminate your debt obligation, thus “settling” the debt.  In plain English, this means that if you owe $10,000 on a credit card, you then negotiate to pay, say, 60 % of the balance, and pay $6,000.  You then no longer owe the creditor any money.

Sounds great, right?  Unfortunately, it’s not so simple. Let’s take a look at some of the not so obvious drawbacks to settlement:

• In order to settle a debt, you generally need to be at least 4 to 6 months behind on that debt.  So, if you are not already that far behind, settlement is probably not the best option for you.

• In order to settle, you also generally need to pay the creditor in one lump sum.  You cannot make monthly payments on a settled balance.  So if you aren’t able to come up with that kind of money, it could be difficult to settle your debt.

• Your credit rating may also suffer if you settle your debt.  Creditors may report your debt as payed but not in full on your credit report, a negative mark which could hurt you for up to seven years.

• Finally, any money that you save in a settlement may have to be reported as income when you file your taxes.  In fact, the creditor is required by law to report any savings of more than $600 to the IRS, so it will be on file whether you report it or not.

Debt Settlement Companies

Debt settlement companies work by requiring you to make a monthly payment to them.  This payment is usually held by them while you fall behind on your bills and you build up enough money to settle.

A good debt settlement company will attempt to negotiate a settlement with your creditors and have them report your debt as paid in full.  If all goes as planned, your credit should not be hurt too much.  However, all does not always go as planned, and you should beware of dishonest companies that do little more than take your money.  Be sure to read up on the pros and cons of debt settlement before trying to settle your debt.

Tags: credit rating, credit report, debt help, debt settlement, IRS, negotiation, paid in full, pros and cons, reduce debt, Settlement Companies