Debt settlement: why the critics are wrong

Many more people are becoming interested in debt settlement as an alternative to bankruptcy. This is because a new bankruptcy law was enacted on October 17, 2005, and it’s a rude awakening for many consumers looking for a fresh start in bankruptcy court.

It used to be that 7 out of 10 people filing for personal bankruptcy got Chapter 7 status, where unsecured debt is completely eliminated. That has changed under the new rules. If your income is above the state median, or if you can pay at least $ 100 per month for your debts, then you will be denied Chapter 7. Instead, you will be moved to Chapter 13, where you pay a portion of debt in 3-5 years.

It gets worse. When the court calculates your allowable living expenses, it will use IRS-approved schedules, not your actual documented expenses. So even if you think you can’t afford $ 100 a month or more, the judge may not agree. Instead of a fresh start, many people will face the grim reality of a harsh 5-year plan, with a court-ordered budget forcing them to adopt a much lower standard of living. That’s where debt settlement starts to look quite attractive.

Yes, I know that debt settlement has its critics. I myself have criticized aspects of the industry. But what critics don’t seem to understand is that this approach is for people who would otherwise go bankrupt. Let’s examine the top three complaints against debt settlement and see where the critics miss the mark.

“Debt settlement has a negative impact on your credit score.”

Wow. What a thing! Imagine it is two years from now. Would you rather have an A + credit rating or be totally debt free? Please choose one, because you cannot have both. All debt reduction programs have a negative impact on credit ratings. That’s why only people who can’t really keep up with their bills should get into one of these programs. But there is no point worrying about your credit while you are burdened with debt. That’s like worrying about how your yard looks after your house has caught fire.

“You may have to pay taxes on the canceled portion of the debt.”

I have always been amazed at how often this lame criticism is repeated in article after article. Yes, you may have to pay taxes on your forgiven debt balances, but the odds are against you. That’s because the IRS allows bad taxpayers to exclude canceled debts. So unless you have a positive net worth, you probably won’t have to pay taxes on your settlements. And even if it did, so what? You would be paying taxes because you saved a ton of money from your debts! And this is a problem?

“Collection activity will continue and you may be sued.”

Yes, if you fall behind on your bills, your creditors will likely continue to try to collect what is owed, and one or more of those creditors could sue you in civil court. But again, this review totally fails. Collection activity is already a function of having debt problems. At least debt settlement allows the consumer to use the collection process to eliminate debt through negotiated compromises. Even lawsuits need not be cause for panic, as they can often be resolved out of court. The only reason to allow legal action to proceed to the point of wage garnishment, property lien, or bank garnishment is lack of financial resources to settle. And if that’s the case, the debtor should speak to a bankruptcy attorney anyway.

In contrast, let’s look at some of the positives of debt settlement.

1. You can save $ 1,000 compared to any other debt elimination method (except for Chapter 7 bankruptcy, which is much more difficult to achieve now that the new law is in effect).

2. You can get out of debt in 2 to 3 years, and much faster if there is some home equity available to work with. This is much better than 5 years in financial boot camp for Chapter 13 bankruptcy, or 5-9 years in a credit counseling program.

3. You maintain control over the process more than with any other approach.

4. You maintain personal privacy. With bankruptcy, your case file becomes a matter of public record, which prospective employers, owners, or creditors can easily locate through Internet searches.

5. Preserve your dignity while solving your financial problems. Bankruptcy still feels like a failure to many people. Debt settlement represents an honest and ethical alternative to that extreme solution.

6. You can adjust your monthly financing on the settlement schedule up or down based on real world conditions in your financial life. If your income fluctuates from month to month, or you are hit by an unexpected expense, it won’t ruin the whole program. The built-in flexibility of debt settlement gives you a huge advantage over other options, all of which require a fixed monthly payment.

Once you’ve made the determination that debt settlement makes sense for your situation, you’ll need to decide whether to go it alone or seek professional assistance. For people who are not easily intimidated, there is no question that the do-it-yourself approach is the way to go. For other people who can’t take the slightest pressure or just want to focus their time and energy elsewhere, hiring a professional settlement company may be the right option.

If you decide to take the do-it-yourself approach, follow these tips:

* Use a privacy manager on your phone service to filter creditor calls so that you only speak to creditors when you are ready.

* Make sure you have a solid game plan to accumulate money to settle with, and reserve the funds in a separate bank account.

* Do not send settlement funds until you have the deal in writing. Without exceptions!

* After paying the settlement, follow up to get a zero balance letter from the creditor, so you don’t have false collection issues later on.

* Learn about your consumer rights by reading the free resource articles on debt, credit, and collections on the Federal Trade Commission website: http://www.ftc.gov

* Don’t be intimidated or pressured into agreeing to a settlement agreement that you cannot handle.

Remember, thousands of people pay off their own debts each year without the need for lawyers or filing for bankruptcy. You can too if you are disciplined, determined, and willing to ignore some of the crazy bill collectors say. When you’re finally debt-free, you’ll feel so much better about figuring it out on your own.