As a bankruptcy lawyer, I talk to people every day about their debts. Many of my clients are very hesitant to file for bankruptcy. I understand your concern. It is a very big decision. By taking this step, many people feel that they have failed or that they are doing something wrong. I try to reassure them that filing for bankruptcy doesn’t make them a bad person, but for most people I know, bankruptcy is their last resort, and therefore they will inevitably ask me about their other options, such as debt settlement. .
Debt settlement may be a good option for some debtors, but usually by the time a person comes into my office, it is no longer an option. Credit cards are out of control or the mortgage is too behind to save the house through a payment plan. There are also many companies that market the virtues of debt settlement to debtors. These ads rarely explain the negative aspects of this process.
Debt settlement generally does not mean that a debtor pays a small fraction of the principal to satisfy the creditor’s claim. Debts are usually settled for lump sums that are still substantial amounts. What the creditor doesn’t explain is that at the end of the year the forgiven part of the debt is reported to the Internal Revenue Service as income and the debtor pays taxes on it, so there is very little net savings in the end.
However, taxes are not the only problem. Creditors who offer debt settlement generally require the debtor to pay the debt in one lump sum. If the debtor had the money to pay the debt, he probably would have paid it. Since the debtor does not have the money, they have to save it over time, and during this time the debtor’s remaining debts continue to increase in interest, so that once the original claim is settled, the remaining debt has continued to grow so that the debtor hasn’t reduced the amount still owed.
There are some cases where debt settlement can work, but for most people the math just doesn’t work. Before settling a debt it is a good idea to seek help from an experienced financial professional. Bankruptcy attorneys often represent debtors in other types of financial matters, such as loan modifications and debt settlement, so they can be good advisers in these types of matters. An accountant can also advise you if your budget can be adjusted to make debt repayment possible.
