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What Is Debt Settlement?

Learn about debt settlement in this Howcast finance video with expert Gregory McGraime.


Debt settlement is usually where you're talking to your lender, and your lender is agreeing to take less money than what you really owe. Now usually you wouldn't even get to that point until you've already been behind for several months on a credit card or some other loan that you have. But let's say for example I owe $10,000 to a credit card company and I haven't been able to make payments for whatever reason over time. At some point that lender is going to worry that boy, they may lose the $10,000 and so they may be willing to settle with you for some amount smaller than that. Maybe they're willing to take $5,000 and call it even instead of the full $10,000 because their rationale is getting something at this point is better than nothing. So from a positive standpoint, debt settlement may allow you to pay less than the full amount that you owe. What's the downside? The downside is that because you've probably already been late making your payments before they'll even consider debt settlement, usually your credit report and score take a pretty big hit because you've been late. The other drawback with debt settlement is that usually you have to have the cash, you have to have money to settle the debt and most of the time, someone that's in a tough financial situation and has been falling behind in their payments, doesn't have the cash setting aside to really be able to settle the debt. Also be aware that when you settle debt, some of the lenders may or may not be able to come after you for the difference, and you may or may not owe taxes on the money that was forgiven. So those are some other drawbacks that occur downstream that a lot of people don't think about but that could impact you. Now just one warning here, there are a lot of companies out there that call themselves debt settlement companies, and unfortunately a lot of times they're trying to take advantage of people that are already in a tough financial situation. So be very skeptical on companies that are advertising or that you hear about that are promising that you're just going to pay pennies on the dollar for the money you owe. More often than not, people end up getting ripped off and it ends up costing them even more and doing even more damage to their credit report. You can settle debt on your own by talking with your lender if it's right for your situation.

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