Sarah Edwards | June 01, 2023
Summary: Debt settlement pros include saving money, giving you a saving structure, and helping you avoid bankruptcy. On the other hand, some of debt settlement’s drawbacks include the expensive fees, risking being sued, hurting your credit score, and being taxed on the forgiven debt. You can settle your debt on your own with SoloSettle, saving yourself a lot of money, time, and stress.
Are you finding it challenging to keep up with your minimum payments on your credit cards or other loans? Are you looking for a way to eliminate your debts quickly while saving money on interest and the amount you owe? If you are, you’ve probably come across debt settlement.
The traditional path of debt settlement involves working with a debt settlement agency to settle your debts for a fraction of their total value. You start by providing the company with a list of all the obligations you want to pay. The agency will create a payment plan for you, and you’ll send them a specific amount of money each month, which they’ll put in a dedicated account for you.
While working with the debt settlement agency, you stop paying your creditors. Once you have enough money in your settlement bank account, the debt settlement company will start negotiating with your creditors one by one. You'll pay the amount due when they reach a settlement agreement with your lender.
The process repeats until you settle all of your debts and graduate from the program.
Beware: some debt settlement agencies are scammy and end up making your financial situation even worse. Some states have even had to create new legislation to govern the practices of debt settlement companies.
Debt settlement has many benefits, such as:
Now, let’s break down each of these debt settlement benefits in detail.
One of the main benefits of debt settlement is saving money. You can save money on interest and fees from your creditor and the total value of your outstanding debt.
For instance, if you have a $1,000 balance with a creditor, your debt settlement agency may be able to arrange a payoff for 60% of the total due, or $600. If you accept the settlement offer, you’ll save $400 plus any future interest charges from the lender.
When you work with a debt settlement agency, you’re turning over the dealings with your creditors to them. They’ll handle the negotiation process, and you’ll simply provide your approval or disapproval of each settlement offer. You won’t need to communicate further with your creditors.
Debt settlement is preferable for individuals who need structure to pay off old obligations. You won’t need to worry about saving the money on your own when it can be tempting to withdraw the funds for other purposes. The debt settlement agency will hold your money for you and use it to pay off your obligations.
Additionally, debt settlement is helpful for individuals seeking to avoid bankruptcy. Bankruptcy can have a devastating effect on a person’s credit report for up to ten years. While debt settlement won’t raise your credit score, the adverse impacts don’t last nearly as long.
Below is an example.
Example: Shelby is being sued by a debt collection agency for a $2,000 credit card debt. After taking a closer look at her finances, Shelby uses SoloSettle to send a settlement offer of $1,200 to the debt collectors. After a few rounds of negotiations, Shelby reaches a debt settlement of $1,500 (only 75% of the original debt amount). Shelby is able to save some money and avoid going into further debt.
Debt settlement does have some drawbacks, including:
Below, we take a closer look at each of these debt settlement disadvantages.
Working with a debt settlement agency can be expensive. Their services aren’t free. Typically, an agency will charge you fees of up to 25% of the total value of your debt, which will eat into the savings from settling your debts.
A debt settlement agency can’t protect you from a potential lawsuit. If a creditor decides to sue you while your account is with the debt settlement company, you’ll need to deal with the claim yourself. You remain entirely responsible for your debts, even if the debt settlement agency manages them for you.
Debt settlement can also hurt your credit score. When you don’t pay off the debt in full, your creditor will report it as a settlement for less. Their report can hurt your credit score, making it more difficult to obtain new credit in the following months and years.
Finally, if you manage to settle your debts for a fraction of the original value, you will likely owe additional taxes for the amount forgiven. The IRS considers forgiven debt to be income unless you file bankruptcy. You may also owe taxes to the state you live in.
Let’s consider another example.
Example: Steven owes several debts and enrolls in a debt settlement company’s program to try to alleviate the stress. Overall, he finds out he owes nearly $15,000 when all his debts are combined. The settlement process takes several years, and by the end of it, Steven ends up owing the settlement company several thousand dollars in fees and having to pay the IRS additional taxes for the forgiven debt. He wishes he would have just tried to tackle each individual debt on his own, saving himself money and stress.
Yes, you can attempt to settle a debt on your own without the help of a debt settlement agency. SoloSettle makes the process even more manageable.
First, you’ll want to determine how much you can pay toward the obligation. We recommend starting with at least 60% of the debt’s value. For instance, if you owe $3,000 to a creditor, you’ll offer to repay $1,800 in exchange for wiping your financial slate clean.
Next, send your initial settlement offer to the creditor or debt collector. It might sound something like this:
"I, [your full name], am offering you a lump-sum payment of $___ to settle my account number ___. You can accept or counteroffer. If you accept, respond to this message with only "Accept." If you want to counteroffer, respond with your new offer amount. Please do not contact me in any other way than by responding to this email. This offer expires in 6 days on MM/DD/YY. I will pay the agreed amount within 90 days of the settlement date."
Once your creditor or debt collector receives your offer, they’ll decide whether to accept or counter with an offer of their own. You may go through several negotiation rounds before reaching an agreement.
Make sure to get a copy of the agreement in writing before transferring any money to the creditor. Your contract will protect you if the creditor decides to pursue you for the remaining balance.
Regardless of your circumstances, you’ll want to adopt better financial habits in the future to prevent other problems repaying your debt.
Learn more about how to settle a debt on your own in this video:
Many consumers prefer SoloSettle over traditional debt settlement companies for a few reasons:
Check out this review from a real SoloSettle customer:
“I'm very thankful for SoloSettle. Having a third party negotiate the settlement was instrumental in resolving this case and saved me from two giant headaches: 1) I didn't have to deal with the plaintiff's lawyer and 2) I didn't have to go to court. I also love that the payment was processed through SoloSettle. I was nervous about sharing my personal financial data with the other side, but SoloSettle protected that for me. I hope I never get sued again, but if I do, I would use SoloSettle again in a heartbeat.
SoloSettle really saved me a ton of time and heartburn and kept me from having to be my own lawyer in court.”
SoloSuit makes it easy to fight debt collectors.
You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.
SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.
Here's a list of guides for other states.
Being sued by a different debt collector? Were making guides on how to beat each one.
You can ask your questions on the SoloSuit forum and the community will help you out. Whether you need help now are are just look for support, we're here for you.
Is your credit card company suing you? Learn how you can beat each one.
Need more info on statutes of limitations? Read our 50-state guide.
Need help managing your finances? Check out these resources.
Out Debt Validation Letter is the best way to respond to a collection letter. Many debt collectors will simply give up after receiving it.
"Finding yourself on the wrong side of the law unexpectedly is kinda scary. I started researching on YouTube and found SoloSuit's channel. The videos were so helpful, easy to understand and encouraging. When I reached out to SoloSuit they were on it. Very professional, impeccably prompt. Thanks for the service!" - Heather