With the unemployment rate still above 9 percent, many debtors have found themselves unemployed for one or two years. Unfortunately for the unemployed debtor, daily expenses remain and can eventually exhaust the debtor's savings, retirement accounts and even cause them to max out their credit cards. Facing long-term unemployment, depleted savings and mounting credit card debt, many debtors are considering debt settlement. But before you take the debt settlement leap, there are a few realities you should consider:
- Even if you are able to get one of your creditors to agree to a debt settlement agreement you may not be able to get all of them to agree. Debt settlement is less effective if you do not have all of your creditors on board, especially if you have numerous creditors.
- Debt settlement can have a negative impact your credit score and reflect poorly on your credit history in the eyes of future creditors. Once a future lender sees that you have a debt settlement with a creditor they may be less likely to lend to you or only lend to you at a subprime interest rate.
- Debt settlement may subject you to more taxes. The IRS will tax any forgiven debt as income. So if you use debt settlement, you must take that possible taxation into account. You should also note that although Chapter 7 bankruptcy forgives debt, the debt which is forgiven in bankruptcy is not subject to taxation by state or federal tax authorities.
- Bankruptcy may be a better option for most debtors. Since bankruptcy considers all of your debt and allows you, in the case of Chapter 7 bankruptcy, to discharge your unsecured debt, it may be a more efficient way of handling your indebtedness. Debt settlement on the other hand often will not be able to handle all of your debt issues as noted in our first point.