As a bankruptcy attorney, I talk to people every day about their debt. Many of my clients are very hesitant to file for bankruptcy. I understand their concern. This is a very big decision. By taking that step many people feel that they have failed or that they are doing something bad. I try to convince them that filing for bankruptcy doesn’t make them a bad person, but for most of the people I meet with bankruptcy is their last resort and therefore they will definitely 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 someone ends up in my office it is no longer an option. A credit card out of control or a mortgage in arrears is too far to save the house through a payment plan. There are also many companies marketing to debtors the virtue of debt settlement. These ads rarely explain the negative aspects of this process.
Settlement of debt usually does not mean that the debtor pays a small portion of the principal to satisfy the creditor’s claim. Debts are usually settled for lump sums that are still large. What the creditors don’t explain is that at the end of the year the portion of the debt that has been forgiven is reported to the Internal Revenue Service as income and the debtor pays taxes on it, so there is little net savings in the end.
Taxes are not the only problem. Creditors who offer debt settlement usually require the debtor to pay off the debt at once. If the debtor has the money to pay off the debt, they will probably pay it off. Because the debtor does not have money, he must save it from time to time, and so far the remaining debt of the debtor is still earning interest, so that after the original receivable is paid off, the remaining debt continues to grow so that the debtor does not reduce the amount still owed.
There are instances when debt settlement might work, but for most people the math doesn’t work. Before paying off debt, it’s a good idea to seek help from a professional experienced in financial matters. Bankruptcy attorneys often represent debtors in other types of financial matters, such as loan modifications and debt settlements, so they can be good advisers on these types of issues. An accountant may also be able to tell you whether your budget can be adjusted to allow for debt payments.