Debt Settlement Pros and Cons

Debt settlement can be both a cost effective and costly solution to handling medical bills. Understanding the consequences of settling medical bills for a negotiated payoff may impact your decision on how to handle them.

The Pros of Debt Settlement

1. Settling debt can be a money saver if you are savvy in how you approach it. Medical bills are some of the hardest debts to collect, so billers and collectors are normally willing to accept a lower settlement amount than on other traditional debt accounts.
2. Once an account has been settled, you are free from harassing phone calls and intimidating letters. These can be embarrassing!
3. Records on your credit report may be updated to show that the account is no longer open. This may add a few points to your beleaguered credit score.

The Cons of Debt Settlement

1. By the time you reach a settlement on an account, it will likely have accrued substantial interest and late fees. Much of what you "saved" may be additional costs rather than the original debt amount.
2. Your credit score will still suffer from the late payment penalty. It will also remain low due to the fact that you settled for a lesser amount rather than paying the full amount due.
3. Debt settlement companies that offer their help tend to charge so much that your "savings" are quickly eaten up by their fees. Typical debt settlement fees are $35 a month plus 15% or more of the "savings."
4. You are required to pay taxes on "forgiven debt" just as if you had earned extra income. Imagine having to pay up to $2,000 in additional taxes simply because you paid $5,000 to settle a $10,000 bill! This is reported to the IRS on Form 1099-C.

Settling medical bills can save some money, but it definitely has its costs also. If you are able to repay the full amount, then you are usually better off doing so. However, if you need a break, be prepared to negotiate a settlement that is in your best interests.

You might notice there are more "cons" than "pros" to settling your medical bills. If you do decide to attempt a settlement, just make sure you have everything in writing. Otherwise, credit counseling or even bankruptcy might be a better fit.

Before deciding on a path, you might want to find out more information on the pros and cons of debt settlement.