Benefits of Debt Settlement
Debt Settlement has two main benefits. The first benefit is reduced debt balance. When you negotiate and settle with a creditor, the creditor typically will accept a lower amount balance than what is owed. The second benefit is no more accrued interest, penalties fees, attorneys’ fees, and court costs. When a debtor has defaulted on a loan or a credit card, the creditor will assess penalty fees, accrue interest on principal balance, and if a lawsuit is filed, court costs and attorneys’ fees are added to the debt amount.
Negative Effects of Debt Settlement
Debt Settlement has three negative effects. The first is reduced credit score. During the debt settlement process, a debtor typically stops making monthly minimum payments because the debtor is experiencing a financial hardship, and therefore, the creditor reports the non-payments to the credit bureaus. The second is tax liability for debt forgiveness. When a debt is forgiven, the Internal Revenue Service may treat the discharge of debt as general income and a debtor must pay taxes on the forgiven debt amount. The third is potential litigation. When minimum monthly payments are not being made, a creditor has the right to file a lawsuit against the defaulting debtor. The likelihood of a lawsuit is dependent on the length of non-payment, debt amount, and likelihood of recovery.
If you want to learn more about debt settlement, please contact our office for a free consultation 949 591 8755.