When you’re drowning in debt, debt settlement can sound like a lifesaver. Companies promise to negotiate with your creditors so you pay less than you owe — who wouldn’t want that? But before you sign on the dotted line, it’s important to understand the serious drawbacks that come with this option.
First, debt settlement can wreck your credit score. Most programs require you to stop making payments while negotiations happen — which means late fees, penalties, and a mountain of negative marks on your credit report.
Second, there’s no guarantee it’ll work. Creditors aren’t required to settle, and some won’t budge at all. Meanwhile, you may rack up more debt from interest and fees.
Third, forgiven debt may come with an unexpected tax bill. The IRS often considers canceled debt as taxable income, which can surprise people who are already financially stressed.
Lastly, some debt settlement companies charge hefty fees, sometimes taking a chunk of your “savings” before you even see relief. Worse, scams are common in this industry.
Bottom line: For some, debt settlement may be the right path — but it’s rarely the easy fix it seems to be. If you’re considering it, talk to a trusted financial advisor first and look at all your options, like credit counseling or bankruptcy, before making a decision that could haunt you for years.
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