Advantages and Disadvantages of a Debt Settlement Plan

A debt settlement plan is a debt reduction strategy for dealing with financial difficulties. A financial professional will negotiate a reduced repayment sum with creditors at an affordable rate for a period of 12 to 36 months. Excessive credit card debt is written-off at the end of the repayment term. As much as 50% of debt is cleared in certain situations.

Why Debt Reduction Strategies are Necessary

- U.S. revolving debt currently stands at $735.3 billion which equates to approximately 31% more than it was just 5 years ago.

- About 43% of American families now spend more than they earn.

- According to CardWeb.com, the average outstanding balance on cards is $8,000.

Advantages of Debt Settlement Plans

Debt reduction. It is possible to cut excessive credit card debt by as much as 50%.

Affordable monthly repayments. Repayments are spread over a period of between 12 and 36 months. It may be possible to increase the term to 48 months.

Delinquent accounts. Certain creditors that had given up hope of repayment may be prepared to remove an adverse credit entry if a debtor is prepared to pay down excessive credit card debt.

Collection agencies. Most debt collection activity will cease once an agreement is reached, provided punctual payments are made.

Convenient repayment terms. This debt reduction strategy is extremely convenient as payment can come directly from your bank account.

Alleviates stress and anxiety. Negotiating credit card debt downwards and preventing further collection agency activity provides peace-of-mind.




Disadvantages of Debt Settlement Plans

FICO score. A debt reduction strategy to eliminate excessive credit card debt may cause a deterioration on your credit score in the medium term. However, the majority of those who enter a debt settlement plan have already defaulted on the terms of a credit agreement.

Taxation. Under current IRS rules, a debt write-off is construed as a taxable income. This may mean that those who enter a debt settlement plan face a large tax bill at the end of the term.

Lack of court protection. Unlike filing for bankruptcy, no court protection from creditors will be provided. Although less likely, collection agencies are still able to pursue a debtor.

Charges. Whilst excessive credit card debt can be cleared in a shorter space of time, any privately run debt reduction strategy isn't going to be free. One of the problems associated with this method is front-loading of fees. This could mean that it takes several months before creditors start to receive payment.

Debt eligibility. It is only possible to deal with unsecured debts. Money borrowed that was secured on a car or property cannot be cleared with this particular debt solution.

It is important to do plenty of research before selecting a debt settlement plan provider. Ask friends and family if there is anywhere they would recommend. Check with the Better Business Bureau to see if any complaints have been lodged before signing-up. This debt reduction strategy can help to clear excessive credit card debt within a few years, provided repayments are made for the full duration. If you stop making payments after a couple of months, the amount owed could actually increase due to the front-loading of fees.

Relevant Articles:
Debt Settlement Help Means Legal Credit Card Debt Elimination
How Does a Debt Settlement Plan Affect Your Credit Score
Is a Debt Settlement Program a Viable Bankruptcy Alternative?
How to Choose a Debt Settlement Company
Do Debt Settlement Programs Reduce Credit Card Debt?

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.