Finding yourself entangled by debts is a possibility that one can never rule out of their financial life. It is an occurrence that leads to weighing the options available to handle the pressure. Some of the available options that you may choose include debt resolution and debt settlement.
Debt Settlement Or Debt Resolution?
Despite being both tools utilized to get your debt amounts to a level that you can pay, they are different. The terms have been used interchangeably over time, creating confusion among the people seeking debt reduction planning. Keeping in mind that the choice you make will consequently affect your financial status, in present and future, it is wise to understand the differences giving the pros and cons of each consideration. Below is a highlight that will give light on the differences.
At first glance, debt settlement sounds like an excellent option. Paying less than the debts you owe is enticing. The process entails the use of debt settlement companies, or you can do it yourself if you have the relevant skills. The procedure includes negotiating with the creditors for the purpose of reducing the amount owed. From there, you will not proceed to pay the amount, instead, set up a trust account, where you will start to deposit and accumulate the funds to reach a particular amount. When the total amount gets to the needed total, the creditors are contacted.
The purpose here is to entice creditors with the lump-sum payment, hoping they will take it and consequently settle the debt. However, what you need to note is that the interest and late fees continue to pile up as you continue saving in the account instead of paying up the debts. This method, when properly executed is efficient. However, several cons accrue as highlighted below.
Cons Of Debt Settlement
- Tax liability – one of the undesirable features accruing from debt settlement is the fact that any amount paid in less of the actual debt exceeding 600 dollars is considered an income. Therefore, taxable, unless for the instances where you can prove insolvency.
- Fees – the debt settlement companies take a huge amount out of the process.
- Risks – There are two typical risks to consider, the short term and the long term risks.
- The short-term risks include the poor credit reports since your debts are past due. You also accumulate late payment penalties and interests. Additionally, you have to have enough money to start the debt settlement process, as a deposit in the escrow account. Getting sued is also not off the table, and that means more financial costs as well as time consumption.
- For the long-term basis, debt settlement process may end up scaring off future creditors, as your credit report may now read debt settled instead of paid in full. This means that the creditors will know that you paid a lesser amount than you owed, and the risk of it happening again, now with them is an adverse feature.
Debt resolution is perhaps more advantageous in comparison to debt settlement. Here, you utilize the services of debt resolution attorneys, who work with you on a plan to establish a debt repayment program that fits you. Consequently, the attorneys represent you to the creditors, seeking lower payments and in addition, trying to get interest charges and other fees out of the equation.
Using this method, you get to stay current with payments, a feature that may play well with your creditors who view you as a committed person. In return, you eliminate the pressure of getting sued. The advantage of employing a debt resolution attorney is that your creditors will view you as a serious party. Also, debt payments done through the debt resolution attorneys take longer periods, giving you the flexibility you need to repay the debt. Debt resolution also comes in as an advantage, since your attorney can convince the creditors to report you debt repayment progress in a way that affects your credit score less adversely, and that is a good thing for your credit report.