Disadvantages of Debt Settlement

What are the disadvantages of debt settlement? It is touted as the solution to many financial woes, but there can actually quite a few downsides. Having a debt cancelled for less than what is owed is a sacrifice, not a get out of jail free card for the debtor.

What is saved in monetary terms is balanced out by the possibility of losing future opportunities and increased costs of borrowing and other financial services in the long term.

The first and most obvious disadvantage of settling a debt is the negative impact it will have on your credit rating. On its own this is really not a disadvantage, however, the lowering of your FICO and other credit scores caused by the negative credit rating will likely cause you some level of financial hardship down the road. It may even prevent you from doing certain things in the future like getting a home mortgage or auto loan.

How a Bad Credit Score Affects You

A lack of financial education in schools has left many people ignorant as to the true effects of bad credit. Before you jump into debt settlement negotiations, you need to seriously consider the potential effects the decision could have the next few years of your life.

These are just a few of the ways a lower credit score can make life more difficult.

• Home and Auto Insurance—a low credit score can mean either higher premiums or being denied insurance altogether.
• Interest Rates—bad credit generally means you will be forced to pay higher interest rates when you borrow money.
• Dubious Lenders—if your score drops low enough, most banks won’t extend credit to you. You will be forced to use less respected lenders.
• Accommodations—bad credit can make it hard get approved when renting a condo or apartment.

Making Debt Settlement Happen

Another disadvantage of debt settlement is that it can be quite difficult to pull off in the first place, there simply are no guarantees a creditor will go along with your negotiation to payoff your debt for less than the remaining balance. It depends a lot on timing.

The creditor must see that you have some money, but not enough to meet their minimum payment requirements. If you are still able to make minimum payments they will prefer to keep you at that level rather than come to some sort of settlement agreement.

But if you fall below the minimum level for payments, they may prefer to take partial payment on your total debt rather than risk losing out completely should you elect to declare bankruptcy. However, there is always a chance the creditor will simply seek out court action to collect.

In other words, you have a very small window of opportunity, and even if you time everything perfectly you still have to have the skills to negotiate the settlement – or hire someone who does.

Employment Difficulties

Limited employment options is one of the disadvantages of debt settlement that catches people off guard. It is not true for all jobs, but in certain industries a bad credit score is considered enough of a black mark on your record that getting selected from a pool of applicants will be virtually impossible.

Likewise, if you have plans to start your own business, a debt settlement can put the brakes on that plan too. The limitations placed on your ability to borrow due to your low credit score could make it nearly impossible to get the financing needed to start a business. There may come a time, if you need a loan to finance your business start, that you may have to wait until your credit score improves to secure financing.