The Disadvantages of Debt Settlement

Debt settlement could bring you more money woes.
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Debt settlement can provide relief if you find yourself in financial turmoil that doesn’t allow you to make further payments on credit or loans. However, the settlement process could cause you more problems with creditors and your credit rating and still result in lawsuits. You have options when you wind up over your head in debt, and debt settlement is among your last resorts.

Fees and Services

Debt settlement companies offer you a way of negotiating with your debtors by settling on a small portion of your debts. You usually stop making payments while these companies deal with your creditors. Debt settlement companies often demand upfront or monthly fees for their services. These firms may also take a portion of the settled figure as part of their fees. Some unscrupulous companies make little or no attempt to reach settlements while you continue paying fees. Many creditors do not deal with debt settlement companies, which leaves you open to lawsuits in order to collect your debt. Judgments usually go to the creditors, who now have legal remedies to collect what you owe, like garnishing your wages or bank accounts.

Credit Score

Even if you are successful in the debt settlement process, your credit score takes a severe negative hit, which can affect your future credit. Although you have reached a settlement approved by your creditor, future creditors who look at your credit report will see that you paid a settlement instead of paying off the full debt. Unless the creditor agrees to remove adverse information like late payments, those will stay on your credit even after you pay off the settlement.

Further Problems

If you do reach a successful settlement, you could still get hounded by collection agencies for the remaining debt. If the remaining debt is completely forgiven, it may come back to haunt you anyway: The IRS requires you to count most canceled debt as income, so you'll owe taxes on the money you thought you saved.


Looking at alternatives to paying off your debts avoids the possible problems you could fall into with debt settlement. Debt management by credit counseling agencies provides a form of settlement. The agencies negotiate with creditors to pay a smaller amount at less interest each month. This may or may not affect your credit rating. Although some creditors see you have had credit difficulties, others see that you have made an effort to pay your debts in full.

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