Should I Settle My Debts?
The following is presented for informational purposes only and is not intended as legal advice or credit repair.
You've probably heard of a debt settlement (sometimes known as debt resolution). It's an agreement between a consumer and a creditor to repay a portion of a debt in exchange for considering the debt paid off. The consumer pays less than what they owe and the creditor gets some of the debt, while avoiding costly legal action. It's not exactly a win-win, but it is a reasonable compromise that lets both parties walk away with no hard feelings.
The thing about debt settlement is that it has a bad reputation. Not because settlement itself is a bad option, but because the people seeking settlement are typically in pretty dire straights, and the more distressed and vulnerable you are, the more likely you are to be targeted by scammers.
So while debt settlement has always been a good idea in theory, for a time there were a lot of bad people associated with settlement, which made settlement itself look like a bad option.
Today, however, things are different. There are many trustworthy companies out there offering to help you complete a settlement with your creditors. So if settlement is safer than it's ever been, is it the right option for you? Here's what to consider.
When is debt settlement right for you?
You can't afford to pay your debts in full
There's a lot of good reasons why you would want to repay your debts in full: it's better for you credit and it's going to make accessing future loans and credit products much, much easier.
But while paying in full is ideal, it's not always possible. Things happen. Costs go up. Income comes down. There's a medical emergency. You may find yourself trying to figure out what to do with a very limited amount of money.
When resources are tight, debt repayment often won't be a priority. Food, shelter, and health all come before making payments on your Target card.
There are plenty of other debt repayment options out there that are more affordable than simply paying the minimum due each month. If your credit's good, you may qualify for a debt consolidation loan with a low interest rate. A debt management plan, on the other hand, can give you a low average interest rate regardless of your credit score.
But those options ultimately require that you repay your debts in full, and even at their most affordable, that may not be something you can manage. Enter: settlement.
You're not concerned about your credit score right now
Whether you're already behind on your payments, or you're intentionally withholding payments in order to negotiate a settlement, pursuing a debt settlement is tough on your credit. There's no way around that.
Your credit score is a number that potential creditors use to determine how likely you are to follow the terms of your agreement and pay back what you owe. Any path to a debt settlement means that you haven't paid them back what you owe.
If your credit score is important to you right now, and you have other options, you may want to avoid debt settlement. But more likely than not, whether you're concerned about your credit score doesn't matter all that much once you're thinking about debt settlement: you just want to be done with your debts.
The good news is that while settlement isn't good for your credit, you can recover, and often faster than you might think. By using settlement as a way to clear the decks and start over, you can start focusing on rebuilding your credit.
You'd like to avoid filing for bankruptcy
Depending on your circumstances, bankruptcy can absolutely be the right option for getting out of debt and starting over. But there are reasons why you may not want to pursue bankruptcy. For starters, the credit damage of a bankruptcy can last longer and spread further than a settlement. And if you don't qualify for a Chapter 7 bankruptcy, you'll end up on a Chapter 13 repayment plan, which may not be any more affordable than a settlement.
Ultimately, debt settlement is usually a less complicated, shorter-term option than bankruptcy, but it's a good idea to review both options to determine which best fits your needs.
When should you avoid debt settlement?
It's pretty simple: debt settlement is a good option when you don't have better options. If your credit is in good standing and you can afford the payments for other debt consolidation options, you're often better off going in that direction. Short term and long term, your finances will be better off if you can manage to repay your debts in full.
That said, don't let stigma or a sense of moral obligation keep you from using the tools that are available to you. Whether it's debt settlement, debt resolution, debt management, debt consolidation, or none of the above, pick the option that best fits your needs and goals.
And if you need help weighing those options and figuring out what's best for you, MMI offers free financial counseling, online and over the phone. Just provide your debts, income, and expenses, and we'll show you which options best suit your unique situation.
