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Debt settlement is quickly becoming a popular alternative to bankruptcy. However, both of these debt relief strategies carry long-term financial consequences. All debt options should be considered before making a final decision.

Both debt settlement and bankruptcy adversely affect FICO credit scores. Debt settlement can remain on credit history for seven years, while bankruptcy remains for ten years. Debt settlement generally requires the assistance of a professional debt settlement company, while bankruptcy requires the assistance of a bankruptcy attorney.

The primary goal of debt settlement is to reduce outstanding debts. Most debt settlement companies are well-connected within the credit industry and adept at negotiating. Some debt settlement companies can reduce outstanding debt by as much as 60-percent, or more.

Individuals enter into a contract with the debt settlement company. Generally, an upfront fee must be paid, along with monthly maintenance payments. The debtor provides the settlement company with a monthly payment to cover individual creditor payments and the maintenance fee until debts are paid in full. Once the agreed balance is paid in full, the negotiated balance is written-off.

Debt settlement strategies can be used when negotiating to pay off credit cards, unsecured loans, student loans, medical bills, accounts in collection and repossessions.

Debt settlement strategies cannot be used to negotiate mortgage debt, secured loans, tax liens or delinquent child support.

It is important to realize when working with debt settlement companies, you will not realize the full discount of debt. A percentage is paid to the debt organization negotiating on your behalf.

Let’s say you owe $50,000 in debts. The debt settlement fee is be based on the full amount. For ease of calculation, let’s say the debt settlement company charges a 20-percent startup fee. This amounts to $10,000.

In addition to the startup fee, there is a monthly maintenance fee. Again, for ease of calculation, let’s say that amount is 5-percent. This brings the total amount payable to the debt settlement company to $12,500.

If the debt settlement company is able to reduce debts by 60-percent, the total payable debt amount would be $20,000. Add in the above amounts and the total is $32,500. This yields a savings of $17,500.

Another consideration of debt settlement is the fact the Internal Revenue Service might impose capital gains tax on the negotiated amount. Experts suggest consulting with a tax professional prior to entering into agreement with a debt settlement company.

Although debt settlement will adversely affect your credit rating, it is not as detrimental as bankruptcy. The impact debt settlement has on your credit depends on your current credit status. If you have relatively good credit, debt settlement will impact your credit more than if you have lousy credit.

Numerous debt settlement companies exist across the U. S. offerings services in nearly every metropolitan city. It is important to conduct research to ensure you are working with a reputable firm. Check with the Better Business Bureau and conduct research online. Also, request referrals from the debt settlement company and contact each individual.

Prior to making a final decision, take time to review other debt relief options. These might include debt consolidation, credit counseling or budgeting.