Debt Settlement

Is Debt Settlement a Good Alternative to Bankruptcy?

If you are in debt, the question of whether debt settlement is better than bankruptcy has probably crossed your mind. People do not want to file bankruptcy for a number of reasons, including bankruptcy’s affect on credit score, a sense of obligation to repay debt, or even the fear of losing a job for filing bankruptcy.

Some of my clients have been able to settle their debts for as little as 10% of the original balance, and debt settlement is a viable and good alternative to bankruptcy. Whether you can or want to do it depends on your circumstances. You should consider some of the following information as you decide how to resolve your debt problems.

1. Debt settlement is often good for people who:
  • Have access to large lump sums of cash to pay creditors;
  • Have a high income that would require a high repayment percentage in a Chapter 13 or disqualify them from filing Chapter 7 under the bankruptcy means test in Georgia;
  • Have assets that are not protected by applicable Georgia bankruptcy exemptions and would be subject to liquidation in a Chapter 7 or a high percentage repayment plan in a Chapter 13;
  • Transferred property with equity out of their names within the last four years; or,
  • Have jobs in the financial or other industry that scrutinizes credit worthiness and the filing of bankruptcy for licensing purposes.
2. Debt settlement is the most successful when you have a lump sum to pay creditors.

That is, while it is possible to do so, settling a debt via a monthly payment is more difficult that with a one-time lump payment. Not only will you be able to settle your debts for less with a lump sum, you will not be obligated to monthly payments for an extended period of time. In my experience, debtors who are able to offer one-time lump sum settlements to creditors are often able to settle their debts for 10% to 40% of their balances. If you are not in a position to make one lump sum payment, you may want to consider filing Chapter 13 bankruptcy, which allows you to consolidate your debts into one monthly payment with no interest or late fees.

3. Debt settlement will result in the issuance of a 1099 that requires you to pay income taxes on the portion of the debt that the creditors forgive.

When you settle a debt for less than the amount you owe, creditors will write off the difference as a loss and issue you a 1099 for that amount. For example, if you settle a $30,000.00 debt for $10,000.00, the creditor will issue a 1099 for $20,000.00, on which you will have to pay income tax. On the other hand, debt that is discharged in bankruptcy is not subject to income tax.

4. Debt settlement is easier when you have stopped paying your creditors for an extended period of time; thus, strategizing to settle debt will probably cause your credit score to drop.

Many people believe that negotiating a settlement with their creditors will save their credit. However, the likelihood of settling your debt a small percentage of what you actually owe is higher if you have not paid the creditor for 6 months or a year. What that means to your credit score is that the failure to make timely payments is reported to the credit bureaus and dings your credit rating. While bankruptcy also dings your credit rating, negotiating debt settlements in lieu of bankruptcy will not avoid dings to your credit score.

In order to determine whether debt settlement is an option for you, please call an Atlanta debt settlement attorney at the Law Offices of Charles Clapp at 404.585.0040 or to schedule a free consultation.