Does Debt Settlement Work?

Many people with debt troubles ask: Does debt settlement work? Well, the answer depends entirely on your situation. The real question should be does settling a debt work for you.

Debt settlement works in the sense that it can help you clear a debt in the short term. But it won't work for everyone with every debt, and there are negative consequences of settling a debt. Let's look at the situations in which debt settlement will work and the situations where it will not.

Clearing Your Debt

Debt settlement involves paying a lump sum payment to a lender which is less than the full amount of the debt, in return the lender clears you of all future responsibility for that debt. In that respect, when you ask does debt settlement work, where clearing a debt is the goal and is accomplished, it definitely works and can be an effective option for some people.

It is best used when you find yourself unable to keep up with monthly payments on a debt, but you have an asset like a piece of real estate or an automobile which can be sold quickly enough to allow you to use the cash generated by the sale to settle a debt. Lenders will often accept a debt settlement offer if it is clear that they may not get their money back any other way. For instance, if you are on the verge of bankruptcy and your lender knows it they may be inclined to take less than the full amount for a payoff.

At first this can sound like a great option, but there is a major drawback. The debt settlement will be recorded on your credit report and your credit score will very likely take a dive as a result. This will make it far more difficult to borrow money in the future and may have other negative results in your financial picture.

If you are fairly young and don't have any current plans to borrow money this may not be much of a concern to you. Over time you should be able to repair your credit through good financial habits and have no remaining negative points on your credit report by the time you are ready to borrow money again.

If your primary goal is to get rid of a debt and you have little concern about the effect it will have on your credit score over the next few years, debt settlement is a good solution.

When Debt Settlement Won't Work

There are several types of loans that simply cannot be cleared using by a debt settlement agreement. You should be aware of these and not go down this road if you find yourself burdened with any of these issues.

• You cannot settle a government debt, tax bill, or student loan.
• If you don't use a legitimate, reputable debt settlement company, you will likely end up with more debt problems than when you started.
• Debt settlement cannot be done if you don't have a way to generate the lump sum cash payment to offer the lender.
• If the debt has been outstanding for too long a lender may be unwilling to negotiate a settlement, especially if legal proceedings have already been filed against you.

The information provided should give you an answer as to whether or not debt settlement is your best choice for debt reduction. If you decide to go down the path of debt settlement make sure you find a reputable company to handle your situation and avoid the multitude of scammers out there preying on the financially naïve.