Debt Settlement vs. Debt Repayment: Which One is Right for You?

Written by: Therese (she/her)

3 min read | Published: April 23, 2024

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If you’re struggling with debt, you may be looking for ways to reduce your debt burden and improve your financial situation. Two common options for debt relief are debt settlement and debt repayment. But what are the differences between them and how do they affect your credit and finances?

What is Debt Settlement?

Debt settlement is a process of negotiating with your creditors to accept a lower amount than what you owe as a final payment. This can help you save money and get you out of debt faster, but it also has some drawbacks. For example, debt settlement can:

Damage your credit score. Settling a debt means you are not paying the full amount you agreed to pay when you borrowed the money. This can lower your credit score and stay on your credit report for up to seven years.
Trigger tax consequences. The IRS may consider the forgiven debt to be taxable income, which means you have to pay taxes on the amount you saved by settling your debt.
Cost you fees. If you use a debt settlement company to negotiate with your creditors, you may have to pay fees for their service. These fees can vary depending on the company and the amount of debt you settle.

What is Debt Repayment?

Debt repayment is a process of paying off your debt in full over time, usually by following a plan or a budget. This can help you avoid the negative consequences of debt settlement, but it also has some challenges. For example, debt repayment can:

Take longer. Depending on how much debt you have and how much you can afford to pay each month, it may take you several years to pay off your debt in full.
Cost you more in interest. If you have high-interest debt, such as credit cards or payday loans, you may end up paying a lot of interest over time, which can increase your total debt amount.
Require discipline. Paying off debt requires you to stick to a plan and make regular payments, which can be difficult if you have a variable income, unexpected expenses, or other financial priorities.

Which one should you choose?

The best option for you depends on your personal situation, such as your income, expenses, debt amount, interest rates, credit score, and financial goals. Here are some factors to consider when choosing between debt settlement and debt repayment:

How much debt do you have? If you have a large amount of debt that you cannot afford to pay off in a reasonable time frame, debt settlement may be a faster and cheaper way to get out of debt. However, if you have a manageable amount of debt that you can pay off within a few years, debt repayment may be a better option to protect your credit and avoid fees and taxes.
How important is your credit score? If you need to maintain or improve your credit score for future borrowing, such as getting a mortgage or car loan, debt repayment may be a better option to show that you are a responsible borrower. However, if you are not planning to use credit in the near future, debt settlement may be a better option to save money and get rid of debt sooner.
How much can you afford to pay each month? If you have a stable and sufficient income that allows you to make more than the minimum payments on your debt, debt repayment may be a better option to reduce your interest costs and pay off your debt faster. However, if you have a low or irregular income that makes it hard to keep up with your debt payments, debt settlement may be a better option to lower your monthly payments and avoid defaulting on your debt.

Debt settlement and debt repayment are two ways to deal with debt, and each has its pros and cons. The best option for you depends on your personal situation and preferences. Before you choose one, weigh the benefits and risks of each option and compare them with other alternatives, such as debt consolidation or bankruptcy. You should also seek professional advice from a financial counselor, a tax adviser, or a lawyer if you have questions or concerns about your debt situation.