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Debt Settlement vs. Bankruptcy

In exploring options to deal with finacial distress many clients often want to try to avoid bankruptcy through debt settlement. It is sometimes feasible to avoid bankruptcy through settlements with creditors but the situation has to be appropriate for it and many times people sign on with debt settlement companies and pay large monthly amounts that initially are applied towards the debt settlement companies fees.  Additionally debt settlement companies may not tell you that you will be taxed on the forgiven portion of the debt and that that amount will be charged to you as income.

Some tips:

The debt should have either been charged off by the original creditor or at least being serviced by a collection company. Original creditors are less likely to make attractive settlement offers. As a rule the older debt gets the less value it has on the secondary market.  

Unless you will be able to settle the debt with lump sum payments in a fairly short period of time you may wind up getting sued by some of the creditors which may drive you into bankruptcy and you will have forfeited all the settlement amounts that could have been discharged in your bankruptcy. Additionally default interest rates will probably be applied by the creditor and the interest accrues at such a onerous rate that any settlement should be done quickly or any benefit quickly evaporates.    

Monthly payments on stale debt is not usually feasible – default interest rates are usually 30% or more which doubles the balance every three years.

The rare situations that debt settlement may be beneficial are when the debt is fairly old and the debtor has come into a lump sum of money that can be used to settle the debt.