Most people consider bankruptcy only as a last resort when debts become nearly unbearable. Although it opens new beginnings, a bad credit record still follows the aftermath, and a filing goes on public records. But the bright side? You have alternatives to bankruptcy.
For a lot of people, this alternative of debt settlement would help reduce their overall debts without filing for bankruptcy.
Here are the general principles of debt settlement as an alternative to bankruptcy, and considerations for its suitability for you.
What Is Debt Settlement?
Debt settlement entails that you or someone you hire for that purpose negotiates with the creditor to get them to accept a lump-sum payment of less than the amount due. Once the settlement amount is paid to the creditor, the account is considered closed.
For instance, you may owe the creditor an amount of $10,000, but the creditor may agree to accept $6,000 in full settlement of that debt.
How Debt Settlement Works?
There are two ways to settle a debt:
- You do it yourself, contacting the creditor directly to negotiate a reduced payoff.
- You hire a debt settlement company to negotiate on your behalf, often after you stop paying and build a settlement fund.
It is generally used for unsecured debts like credit cards, medical bills, and personal loans. Mortgages and car loans are seldom eligible.
Pros of Debt Settlement
- Avoids bankruptcy and the long-term stigma involved.
- Less total debt to pay back
- Much quicker time frame than waiting for resolution under a Chapter 13 repayment plan.
- Achieves debt relief in a time frame of generally 2–4 years
Cons and Risks
Debt settlement can have some downsides:
- Credit damage once again stays on the record, especially when you cease payments.
- There are no guarantees that the creditor will work with you to settle.
- Forgiven debt greater than $600 could be counted as taxable income.
- Debt settlement companies charge exorbitant fees
This post was written by Trey Wright, an experienced bankruptcy lawyer Jacksonville FL! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, specializing in bankruptcy law, estate planning, and business litigation.
The information provided on this website does not, and is not intended to, constitute legal advice; all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.
