Negotiating Your Debts: Pros

• By negotiating and settling your debts, you can satisfy a debt by having legally paid a fraction of your balances. This may be a suitable choice if this can improve your financial situation relatively quickly because you won't be saddled with a heavy monthly debt burden. You also will owe much less in principal and interest than if you pay your debts over time. If you are financially responsible and your debts were the result of a job loss or medical expenses, it may be the appropriate choice, especially if you will not need to apply for new credit for at least a year.
  
  

Negotiating Your Debts: Cons

• The biggest risk is to your credit history, because over 35 percent of your credit score is based on "on-time payments." When you negotiate a settlement, you will not pay the creditor the full amount of the loan, and it is reported on your credit report as "settled" or something similar rather than "paid in full." That hurts your credit score. To negotiate with your lender, you must be several months behind on your payments before the lender will consider a settlement. That means your credit score already has been damaged. Consider that it may be awhile -- perhaps as long as two years -- before you can be approved for a mortgage or auto loan, because your credit score will be lower. If you can obtain a loan, the interest rates you'll be charged will be higher than an applicant who has excellent credit, because you'll be considered risky. Late payments and settlements remain on your credit report for seven years, although recent late payments are more damaging that late payments from five or six years ago.
  
  

Maintaining Your Debts: Pros

• You will keep 35 percent of your credit history intact by maintaining on-time payments. You'll also know that you satisfied the terms of your credit agreements. You may be more able than you realize to pay your debts back quickly. Try eliminating daily expenses you can avoid, and put the additional money toward your highest-interest rate debt, while paying only the minimums on the others. When the first debt is paid off in full, apply that payment to the next debt on your list. Continue until you're debt-free.
  
  Consider using a debt management plan. Call the National Foundation for Credit Counseling for details. You may be able to pay your debts in full within five years, often with reduced interest and fees. Debt counseling may appear on your credit report, but it is better than settling, because you will pay the debts in full.
  
  

Maintaining Your Debts: Cons

• If you elect to maintain your debts, you'll pay much more in interest and principal over the life of the loans. Because 30 percent of your credit score is "amounts owed," having a high debt load negatively affects your credit. You'll have less flexibility and freedom should an emergency or opportunity arise. If your financial situation is dire, remember that in bankruptcy proceedings, credit card debts are wiped out. Filing for bankruptcy does major damage to your credit score, and a bankruptcy remains on your credit report for up to 10 years. If you are seriously considering bankruptcy, contact an attorney who can advise you on how to preserve as many of your assets as possible.