Debt settlement has become more and more of a debt management option these days because of the economic crisis. The tightening job market and dropping real estate values have families worried about their future. To make matters worse the recession has pushed many consumers underwater. Debtors have been forced to negotiate with their lenders to not only reduce interest rates and fees but also the amount of debt owed. While some opt for loan consolidation, there are those who choose debt settlement as a means of easing their financial burden.

Debt settlement means that the lender will agree to forgive part of your debt as long as you continue to make monthly payments for the remaining balance. Some creditors will only accept debt settlement as an option if a lump sum is paid, rather than monthly payments. If the debt is secured against an asset, such as a car or home, the lender may feel that the asset is worth taking back rather than settling for a lesser payment. Unsecured loans, such as credit cards, store credit, and medical bills, are the best option for debt settlement. It's something that can be of great help to someone in a tough financial situation but there are also downsides to this method.

Most people don't realize that taxes may have to be paid on the amount of debt the lender has agreed to forego. The fact that your debt has been forgiven may count as income and could very well mean an increase in your taxes. Talk with your accountant to see if this is the case with you.

Overwhelmingly the main downside for debt settlement is the fact that your credit scores will be affected. The lender may forgive the debt but the fact you didn't pay it will be reported to the credit bureaus and remain there for a number of years. You may have a challenge ahead of you in obtaining a loan in the future. This could make things difficult when it comes to purchasing a car, a home, or, depending on your situation, even renting an apartment.

Credit scores are also considered by many employers when making the decision to hire. Insurance companies view credit scores as a measure of responsibility when determining rates.

Lenders have the right to file legal action against someone seeking debt settlement. The fact that you are attempting to get the balance you owe reduced, may trigger a warning sign. The lender could negotiate with you and pursue litigation at the same time. Until you have actually paid the reduced amount in full, the lender may consider legal action.

While debt settlement can be an option in times of crisis, it's not something that should be considered lightly. If anything can be done in order for it to be avoided, it most certainly is in your best interest to do so. Desperate times call for desperate measures and debt settlement is an option to get yourself out of a difficult situation. It will impact your life in the years ahead.