Debt Settlement: A Good Bankruptcy Alternative?

Debt settlement may be a good bankruptcy alternative depending on whether people want to take risks when pursuing financial freedom. Debt settlement companies, also referred to as debt negotiation firms, are one of the debt management solutions people consider. Debt settlement, like Chapter 13 bankruptcy, allows people to repay their debts over time. Debt settlement and bankruptcy have advantages and disadvantages. For instance, Chapter 7, another personal bankruptcy option that doesn’t require people to repay money. However, people may have to turn over nonexempt items—which don’t include things like cars and work-related tools to the trustee to help pay off debts.

Debt Settlement Companies Help People Repay Debt

When people sign up with debt settlement companies, they agree to have these companies represent them and negotiate on their behalf with creditors. This means debt settlement companies contact creditors to negotiate one or three things. For instance, they negotiate lower payments, lower interest rates and canceled portions of the total debts. In addition, debt settlement companies negotiate with all the creditors people want to repay. Typically, according to NOLO, debt settlement companies often claim to convince creditors to discount debt 10 to 50 percent. Once the negotiation settlements are agreed upon, the creditors may indicate on people’s credit reports that the debts are settled. Also, people stop making payments to creditors and start depositing money payments into a bank account set up for debt settlement payments. The debt settlement companies then make the payments to creditors.

Debt Settlement Companies Cost Money

People should be aware of using debt settlement companies because they charge fees to help—even when they claim to be non-profit. Unfortunately, some of these companies may not be legitimate. According to the, some debt settlement companies don’t contact creditors even though they accept monthly payments, according to the Better Business Bureau of Greater Maryland.

Possible Negative Outcomes

Although debt settlement companies do help people seeking financial freedom, there are negative possibilities. Creditors may not accept negotiated payments or agree to work to debt settlement companies. Also, debt settlement doesn’t stop legal proceedings. Creditors can collect debt settlement payments and sue. Only bankruptcy offers legal protection against lawsuits from creditors.

According to the U.S. Federal Trade Commission (FTC), the Internal Revenue Service (IRS) may consider any amount of forgiven, or cancelled, debt to be taxable income. The debt settlement company may not inform people that they owe unpaid taxes, but the IRS will.

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