Advantages of Settlement

Settlement is a quick and efficient means of reducing your debt load by effectively eliminating a portion of your remaining principal. If you are making the minimum payments on a credit card, settlement also saves you the significant interest charges racked up every month and achieves finality without destroying your ability to secure new credit. Delinquencies on your accounts will damage your credit score, but they also increase your leverage to negotiate the best deal. The further behind you are in your payments, the greater the risk assumed by the creditor.

You can request your credit file be updated to reflect that the debt was settled in full once a settlement is achieved. This demonstrates you’re making the effort to resolve your financial difficulties. A well-structured settlement also avoids the need for a debt consolidation loan that may require collateral assets. It’s unwise to risk other assets for a new loan if you’re eliminating unsecured debt.

Unlike a bankruptcy that stays on your file for 10 years, a settlement is viewed as a temporary condition designed to get you back on track with your finances. A bankruptcy makes it extremely difficult to get any new credit and the stress and social stigma can be lasting.

One particularly detrimental disadvantage to settlement is the possibility of the canceled portion of your debt being reportable income for tax purposes. It’s not worth negotiating a settlement unless the amount forgiven is more than enough to cover the additional tax. Consult your tax advisor regarding tax implications, and to determine if you qualify for the IRS insolvency rules.

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