If you have fallen behind on your bills and don't see a way out, your best chance to escape the burdens of late fees, accrued interest and nagging phone calls from bill collectors might be a debt settlement. But settling a debt isn't a free ride--there are consequences that come with a debt settlement. Because you aren't paying your debt in full, you will have to deal with a hit to your credit and a damaged reputation with your creditor.
Lower Credit Score
When you fail to make payments on a bill or debt, it creates negative listings on your report every month you're behind. Settling a debt will end these negative listings, but it will also mark your debt as settled, which differs greatly from paid in full. A settled debt is a negative listing, and it will remain on your credit report for seven years, weighing down your credit score.
Damaged Reputation
If you are forced to settle a debt with a creditor, that creditor is almost certain to take a loss, even if the high fees and interest rates they've charged you help defray it. If you are dealing with a creditor on which you rely for multiple accounts, such as your bank, this could be an extremely damaging event that could ruin your relationship with your bank. That damaged relationship might force you to seek credit in unfamiliar territory, where you'll have a weakened credit score.
Unpaid Debt May Be Taxable
In some cases, the money you save by settling a debt can be interpreted as income by the government, in which case the creditor would send you a 100-C tax form. You would then have to pay federal and possibly state income tax on that lump sum.
Member Comments