Debt Settlement is perhaps the most popular alternative to bankruptcy. Many people mistakenly believe debt settlement to be the safer, superior choice to bankruptcy. This is not the case and all debt relief options should be considered.
Debt settlement involves you or your attorney initiating contact with the creditor or collection agency making known your intent to “settle the debt.” Typically, a reduced cash, lump-sum payment is offered to settle the entire debt.
Depending on your financial health, the age of the debt, the aggressiveness of the collector, whether you are represented by a lawyer and a host of other factors, most creditors will accept settlement in the 20% to 50% range.
Advantages of Debt Settlement
Perhaps the only advantage of debt settlement is the ability to avoid bankruptcy. Some people cannot get over the stigma of filing bankruptcy and subscribe to the mistaken belief that “bankruptcy destroys your credit.”
It can be a viable alternative for those individuals or families who simply do not qualify for bankruptcy or are unable to file bankruptcy due to ownership of substantial assets or wages earned in excess of the means test requirements.
Typically, if you qualify for and are able to file for bankruptcy, it is the most cost-effective, efficient way to get out of debt.
Disadvantages of Debt Settlement
One disadvantage of debt settlement is the cost. Creditors or collection agencies will usually require a lump-sum cash payment to settle debt. It is often very difficult for consumers struggling with debt to come up with these lump-sum payments. The inability to do so will often disqualify you from getting the settlement deal you were hoping for.
Another disadvantage of debt settlement is the complete absence of court protection. Even if you are making a good faith effort to settle the debt and engaged in negotiations with a creditor, there are no protections from continued collection activity or even legal action including lawsuits, bank levy or wage garnishment. On the other hand, filing bankruptcy triggers the “Automatic Stay” which will protect you from all creditor collection activity.
Perhaps the most important disadvantage of settling debt is the tax consequence. All savings from debt settlement are taxed as income. A 1099 form is issued by the creditor for settled debt and that settlement is reported to the Internal Revenue Service. In contrast, there is no tax consequence with bankruptcy.
*It is important to understand that the above information highlights only some of the procedural aspects to a Debt Settlement Matter. For more information and for a full evaluation of your case, please contact my office to schedule a free consultation.