Upside and Downside of Debt Settlement

Created on 2008-04-10 03:52:17

It is one of those situations that you never want to think about. You have too much debt and not enough income, what can you do? Debt settlement is an option which is appealing to you and your creditors. To help you negotiate this potential minefield there are a growing number of companies offering debt settlement services.

The debt settlement issue came about due to several historical factors. Initially in the US, the deregulation of the banking industry in the 1980’s made consumer credit easier to come by. Credit cards became common place and consumer spending rose tremendously.

Unfortunately this rise in consumer debt coincided with a recession and consumers were then in the position of having too much debt and the inability to repay. The option for many people at time was declaring bankruptcy which not only was a devastating situation for the consumer, but bad news for the creditor who would see little, if any, of their debt repaid.

The answer to this problem for both consumer and creditor was debt settlement. With this method the creditors are able to negotiate with the consumer, via a third party, a debt settlement company. The debt settlement company will review all of the consumer’s debt and negotiate with the creditors to establish some repayment of a percentage of the debt owed.

Many consumers in debt will have a number of creditors. Therefore the debt settlement company will have to negotiate over a period of time to satisfy all parties. However this service is beneficial to the creditors as to does guarantee a higher percentage of the debt will be repaid than if the consumer declared bankruptcy. In addition creditors would generally receive lower repayment if they used a collection agency, which takes a percentage of the debt collected.

There are downsides to debt settlement that consumers may feel are detrimental. The tax implications of debt settlement can be substantial. Consumers who settle their debt outside of bankruptcy are obliged to record the forgiven debt as taxable income. This added liability must be assessed before consumers decide whether debt settlement is a favorable option over declaring bankruptcy.

Being in debt is not a situation many of us want to be in, but due to a variety of circumstances it can always be a possibility. Debt settlement is an option for any of us who cannot repay the creditors we owe. But always get advice before deciding on any course of action as the ramifications of can last for many years.