Advantages and Disadvantages of a Debt Settlement Plan

A debt settlement plan is a debt reduction strategy for dealing with serious money problems. It's widely regarded by financial experts as the leading alternative to bankruptcy. Your intermediary will re-negotiate the terms of credit, so you get to make an affordable repayment on your debts for the next 12 to 36 months. Excessive credit card debt, up to 50% of the amount owed, is eliminated at the conclusion of the repayment term.

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 charge card balance is $8,000.

Advantages of Debt Settlement Plans

Debt reduction – There are no guarantees, but it's possible to cut excessive credit card debt by up to 50%.

Affordable monthly repayments – Repayments are spread over a period of between 12 to 36 months. In certain circumstances, it may be possible to extend the term.

Delinquent accounts – Creditors may be prepared to remove a bad credit entry if the debtor is willing to pay down debt.

Collection agencies – Collection activity will normally cease once an agreement is reached.

Convenient repayment terms – Payment can be made directly from your checking account.

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

Relevant Articles:

• A Credit Card Settlement Plan Helps You to Pay-off Your Debts
• How Does a Debt Settlement Plan Affect Your Credit Score

Disadvantages of Debt Settlement Plans

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

Taxable indebtedness income – Under current IRS rules, a write-off is construed as a form of taxable income. This may mean that those who enter a plan will face a large tax bill.

Lack of court protection – Unlike filing for bankruptcy, there's no court protection from creditors. Collection agencies can still pursue you for repayment.

Charges – A debt reduction strategy isn't free. About 15% of each payment will be taken in charges. The Federal Trade Commission (FTC) has made it illegal for intermediaries to front-load fees.

Eligibility – You can only clear unsecured debts, not the money owed on your home or auto.

It's important to do plenty of research before selecting a debt settlement plan company. Ask friends and family if there's anywhere that they'd recommend. Check with the Better Business Bureau (BBB) to see if any complaints have been lodged prior to signing-up. Provided repayments are made for the full duration, you could be completely free from debt within just 3 years.

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.

Updated: 30 April 2011