According to LaToya Irby for About.com, debt settlement is a bad choice because consumers rack up late payments on credit reports while waiting for the debt settlement company to settle the debt. Settled debts are also not erased from the consumer's credit report but updated as a settled account. Taxes may have to be paid on the settled debt since the IRS looks at the unpaid amount as income.Continue Reading
Debt settlement companies operate by acting as a negotiator on behalf of the consumer to negotiate a settlement amount with the lender on the outstanding debt. Consumers are advised to stop paying the debt and cease contact with the lender to make a settlement more plausible. Leslie McFadden for Bankrate notes that debt settlement is a bad idea because some debt settlement companies pay themselves first, which means creditors may not get paid for months and the consumer continues to get late payment notations on his credit report and interest and other fees tacked on to his debt.
There is no guarantee lenders will accept the debt company's offer and high debt may lead a lender to sue the consumer. A consumer also has the option of settling the debt with the lender on his own, independent of a debt settlement company, notes Irby.Learn more about Credit & Lending