Pros and cons of debt resolution
By Aaron Crowe
Published on July 09, 2023
Read time: 5 min
Debt resolution could significantly reduce what you owe.
Resolving debts may be an option if you can’t afford to repay all of your debts in full.
Debt resolution isn’t a silver bullet. It'll require time and commitment.
Addressing your overwhelming debt can help you improve your credit standing, increase your cash flow, and reach other financial goals. Releasing a financial burden can bring feelings of peace and satisfaction. You may even sleep better.
The only question is how to tackle your debt. You can answer that question by weighing the pros and cons of each option. Here we’ll explain the advantages and disadvantages of debt resolution so that you can decide whether it might be right for you.
What is debt resolution?
Debt resolution is when your creditors agree to reduce the amount that you owe. After you pay the lower amount that you and your creditor agree to, the creditor closes out the debt and considers it paid in full. Creditors may be willing to do this if they believe you can’t afford to fully repay the debt. After all, something is better than nothing, so they may negotiate as a way to recoup some of what they are owed.
Debt resolution is only appropriate for credit card debt and other unsecured debt (debts that aren’t guaranteed by something valuable). It doesn’t work for secured debts like auto loans or mortgages. It’s also not an option for federal student loans.
How debt resolution works
Anyone can resolve their own debts, but in this article, we’re focusing on professional debt resolution. Many people choose to get help from a reputable debt resolution company because although the process of resolving debts is straightforward, it’s not easy.
One of the first things the pros will do is set up a Dedicated Account that you can put money into each month to build up funds for making offers to your creditors to resolve (or “settle”) your debt. You’ll contribute an affordable amount that you are comfortable with. It’s your account, and you own the money in it.
Once there’s enough money in your account to make an offer, expert negotiators will start working with your creditors. Any agreement they reach will be presented to you for your approval. Once you approve, the creditor and the debt resolution company are paid from your Dedicated Account, and that debt goes away. Legitimate debt resolution companies never charge upfront fees.
A debt resolution program usually takes two to four years to complete. Most Achieve Resolution clients resolve their first debt within three months.
Debt resolution pros
Here are some of the benefits of debt resolution.
Significantly reduce what you owe. Resolving debts for less than the full balance owed could save you money.
Get rid of debts faster. Debt resolution could help you get rid of your debts faster than by making the minimum monthly payments.
Improve your cash flow. Your monthly contribution to your Dedicated Account is typically lower than the monthly minimums you pay creditors. That could help free up money to pay for essentials or build up an emergency savings fund.
No upfront fees. Reputable debt resolution companies never charge a fee until after you get results. There are no monthly fees. You shouldn’t be charged until after an agreement is reached with your creditor, you approve it, and at least one payment is made toward that agreement.
Many types of debt could be resolved. Debt resolution is an option for credit card balances, medical bills, personal loans, utility or cell phone bills, some private student loans, and other unsecured debts.
Support during tough times. When you hire a professional debt resolution company to help you, you get support from experts during what might be one of your roughest financial patches. Money problems can cause high stress. Working with seasoned pros can provide much-needed relief.
Debt resolution cons
Can impact your credit. Most people who start a debt resolution program choose to stop paying their bills if they aren’t already behind. Creditors tend to be more willing to negotiate if they believe you can’t afford to repay the debt. Missing payments can negatively impact your credit profile.
Potential tax liability. You might be responsible for paying taxes on the money you save through debt resolution. Not everyone pays taxes on forgiven debt. If you’re insolvent—your debts are worth more than your assets—you won’t be required to pay taxes on the amounts that are forgiven. Discuss your situation with a tax professional.
Might have to endure legal action. Some creditors may try legal tactics, such as lawsuits, to get you to repay your debt in full. Reputable debt resolution companies may provide you with access to legal services to negotiate the debts if a creditor takes legal action.
Things to consider before choosing debt resolution
Debt resolution is just one potential solution to serious debt problems. There are also other ways to get rid of your debts. You can:
Use the snowball or avalanche method to pay off debts in full yourself.
Enroll in a debt management plan managed by an accredited credit counselor and pay off your debts in full. The counselor may be able to help you get lower interest rates.
File for bankruptcy. You might have to give up some of the things you own or agree to give up all of your disposable income for a few years.
It’s not a bad idea to consider the pros and cons of each of these options.
A big factor to consider before choosing a debt resolution plan is the cause of your debt. Many people find themselves facing financial hardship because of life circumstances like divorce or illness. But there are those, too, who struggle to manage their finances. If your hardship was the result of a lack of financial knowledge, debt resolution should be considered part of a larger plan to manage your money better.
Frequently asked questions
Is it worth partially settling a debt?
Yes. A partial settlement could help you get rid of a debt quicker than doing nothing. Any steps you can take, large or small, to reduce and get rid of debts can ultimately help you improve your financial situation.
Is it better to settle a debt or pay in full?
If you can fully repay what they owe, you should. Debt resolution is for people with financial hardship who can’t get rid of their debt without some degree of debt forgiveness.
Objectively, when it comes to your credit, settling your debt for less than the full amount owed is better than not paying at all. Debts reported as settled stay on your credit report for seven years from the date the creditor first reported the account as being delinquent. Over time, the settled account has less of a negative impact on your credit.
How does debt resolution show up on your credit report?
Debts that are resolved for less than the full amount that you owe can be reported as “settled” or “account paid in full for less than the full balance.” This information can negatively impact your credit.
The impact of negative information on your credit report lessens over time.
Addressing your debt situation can have a lasting, positive impact on your credit profile as well as your financial situation. The best ways to build excellent credit are to make all of your payments on time and keep your credit card balances low.