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The Dangers of Debt Settlements

A recent study shows that the average American is in debt for approximately $18,000. With so much debt, people are looking for a way out of paying these large amounts of money and as a result, they usually turn to debt settlements.

Debt settlement is a process by which a debtor and a lender negotiate a repayment amount on a loan or debt that is owed to the lender/creditor. This way, a person may end up returning less than what they actually owe.

This may sound like a dream come true; however, there are certain dangers of debt settlement. Four of the biggest dangers of debt settlement are mentioned below:

Damage to Credit Score

It is important to realize that debt settlement does not improve a person’s credit score. It can actually have an adverse affect on a person’s credit score and ruin it further. The reason for this is because debt settlement works to wipe out a person’s debt as quick as possible.

Outstanding Balances Grow

It is important to realize that if a person does not pay their debts on time, there will usually be an additional interest or late fees charged to a person’s account. Until these charges are settled, the creditors do not have to reduce the balance owing if they do not want to.

Lawsuits Can Emerge

You may not want to settle a debt for a certain amount. You may want the amount to be less than what is being said, however, a creditor is allowed by the law to sue a person to collect the debts that are owed to them. If a creditor decides to sue, the only option left is debt consolidation, that too at a quick pace and a price above what you may be willing to pay.

Effect on Income Taxes

It is important to realize that debt settlement can have an effect on a person’s income taxes. By law, if a forgiven debt surpasses $600, then the creditor is obligated to report this to the IRS for review.

According to the IRS, if a forgiven debt surpasses the amount mentioned above, it may be excluded from a person’s income tax. Of course conditions apply; however, this is a very common scenario that should be watched out for.

There are many more dangers of debt settlement. Before debt settlement, it is always wise to contact a tax professional so that they can provide one with the best advice and course of action possible.

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