Debt settlement is when you pay your creditors only a portion of what you owe them. When you stop making your monthly payments for several months, your creditors will worry about getting what they are owed.
They may contact you, or you can reach out to them to reach an agreement that works for both sides. They may settle for a small lump sum in exchange for erasing the rest of your debt.
While this sounds like a deal of a lifetime, it can significantly damage your credit score. There are pros and cons to debt settlement that you should consider before turning to this option.
Pros of debt settlement:
• You will only pay a fraction of what you owe, which could save you thousands of dollars.
• You can get rid of debt faster than you can by consolidating credit card debts and other accounts.
• It may be your only option if you have no other way of paying the total debt.
• You can avoid bankruptcy.
Cons of debt settlement:
• Your credit score will take a hit from not making your monthly payments.
• It can take seven years or longer to fix your credit.
• Your debt may still go to a collection agency if you cannot come to a settlement agreement.
• Your creditors may not agree to negotiate with you.
• You may be charged fees, which can add to your expenses.
Other options, like consolidating credit card debt into a loan, can save you money without jeopardizing your credit score.