It is virtually impossible  to turn on the television or radio without hearing or seeing an advertisement for debt settlement.

The companies that advertise their services for debt settlement offer a myriad of different approaches to “settling” the debts of their clients.

Debt settlement in its simplest form is offering a creditor a lower payoff of the debt than what is owed.

I would not say there is never a time for entering into negotiations with a creditor regarding the settlement of debt, because the individual circumstances of each Debtor varies on a case by case basis.

I have seen multiple clients in the last several months who had hired companies to settle their debts and ended up in my office frustrated that they could not afford the payments on their settled debts or were facing the continued collection activities from a particular creditor.

If you choose to enter into negotiations with a creditor regarding the settlement of a debt, I recommend that you handle the negotiations yourself rather than paying a third-party to do what you could do independently.

In my bankruptcy practice I have discovered time and time again that clients would have been much better suited to have filed a bankruptcy than to have hired a third-party to settle or negotiate their debt.  Some of the reasons for this are:

  1.  The debt settlement company generally sends nothing to the creditor until they have accumulated payments from you over an extended period of time, and they take a portion of whatever you pay them as their fee for their services.  If you drop out of the debt settlement program don’t expect to receive a return of any of your money. Most debt settlement companies have drafted their contractual agreements to keep whatever you have paid them.
  2. f you don’t have a written agreement from the creditor that the amount they have agreed to accept is payment in full, then they may sell the remainder of the debt to a junk debt buyer or to a collection agency to collect.
  3. Forgiven debt through a settlement is taxable income and you will receive a Form 1099-C from the creditor for any debt above $600 that is forgiven.  Forgiven debt in a bankruptcy is not income as to the Debtor.
  4. When you factor in the interest for the period of time that a creditor is not receiving payments and the income tax consequences of forgiven debt it is likely that you are really not saving any money.
  5.  Your credit rating is still going to be ruined with any debt settlement. This is probably the greatest benefit of bankruptcy over debt settlement.  If you are in a debt settlement program that will take years to complete, then the credit rebuilding process will not begin until the creditors are paid according to the negotiated settlement. In a bankruptcy the Debtor begins the rebuilding process immediately after the bankruptcy discharge is entered.

From my experience as a bankruptcy attorney I have repeatedly heard clients tell me that they wished they would have filed for bankruptcy protection rather than to have wasted their time and money with a debt settlement company.

Remember that if you do chose to enter into negotiations with your creditors regarding the settlement of your debt, then do it yourself, don’t pay someone to do something that you can handle on your own.

Please give us a call for a free consultation if you are in financial difficulty and are weighing the choice of a bankruptcy or debt settlement.

As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation.  Bankruptcy, as many other areas of the law, can be very case or fact specific.  I pride myself on giving you the answers to your questions that are based on your individual circumstances.

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