After October 17,
2005, a lot of people are going to become interested in debt
settlement as an alternative to bankruptcy. That's the date the new
bankruptcy law goes into effect, and it means a rude awakening for
many consumers seeking a fresh start in bankruptcy court.
It used to be that
7 out of 10 people filing personal bankruptcy were granted Chapter 7
status, where the unsecured debts are totally wiped away. That will
change under the new rules. If your income is above the median for
your state, or you can pay back at least $100 per month toward your
debts, then you'll be turned down for Chapter 7. Instead, you'll be
shifted into Chapter 13, where you pay back a portion of the debt
over 3-5 years.
It gets worse.
When the court calculates your allowable living expenses, it will
use the approved IRS schedules, not your actual documented expenses.
So even if you don't think you can pay $100 a month or more, the
judge will probably disagree. Instead of a fresh start, many people
will be faced with the grim reality of a harsh 5-year plan, on a
court-mandated budget that forces them to adopt a much lower
standard of living. That's where debt settlement starts to look
Yes, I know debt
settlement has its critics. I've criticized aspects of the industry
myself. But what the critics don't seem to understand is that this
approach is for people who would otherwise go bankrupt! Let's
examine the three main complaints against debt settlement and see
where the critics are missing the mark.
has a negative impact on your credit score."
Wow. Big deal!
Pretend it's two years from now. Would you rather have an A+ credit
rating or be totally free of debt? Pick one please, because you
can't have both. All debt reduction programs have a negative impact
on credit scores. That's why only people who truly can't keep up
with their bills should go into one of these programs. But it's
pointless to worry about your credit while you're being crushed with
debt. That's like worrying about how the yard looks after your house
has burned down.
"You might have to
pay taxes on the canceled portion of the debt."
I've always been
amazed at how frequently this lame criticism is repeated in article
after article. Yes, it's possible that you may need to pay taxes on
forgiven debt balances, but the odds are against it. That's because
the IRS allows insolvent taxpayers to exclude canceled debts. So
unless you have a positive net worth, you probably won't need to pay
taxes on your settlements. And even if you did, so what? You'd be
paying taxes because you saved a bunch of money off your debts! And
this is a problem?
activity will continue and you might get sued."
Yes, if you fall
behind on your bills, your creditors will most certainly continue
attempts to collect what's owed, and one or more of those creditors
might sue you in civil court. But again, this criticism totally
misses the mark. Collection activity is already a function of being
in debt trouble. 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, since they
can often be settled out of court. The only reason to allow a legal
action to proceed to the point of wage garnishment, property lien,
or bank levy is lack of financial resources with which to settle.
And if that's the case, the debtor should be talking to a bankruptcy
In contrast, let's
look at some of the positives of debt settlement.
1. You can save
$1,000s versus any other method of debt elimination (except for
Chapter 7 bankruptcy, which will become difficult to accomplish
after the new law takes effect).
2. You can get
out of debt in 2-3 years, and much faster if there is some
available home equity to work with. This is a lot better than 5
years in the financial boot camp of Chapter 13 bankruptcy, or 5-9
years in a credit counseling program.
3. You keep
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, easily located via Internet search by future
employers, landlords, or creditors.
5. You retain
your dignity while working through your financial problems.
Bankruptcy still feels like failure to a lot of people. Debt
settlement represents an honest and ethical alternative to that
6. You can
adjust your monthly funding into the settlement program up or down
depending on real-world conditions in your financial life. If your
income fluctuates from one month to the next, or you get hit with
an unexpected expense, it won't torpedo the whole program. The
built-in flexibility of debt settlement gives it a huge advantage
over other options, all of which require a fixed monthly payment.
Once you're 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 aren't easily intimidated,
there's no question that the do-it-yourself approach is the way to
go. For others who can't handle the least bit of pressure or just
want to focus their time and energy elsewhere, hiring a professional
settlement company may be the correct choice.
If you do decide
to take the do-it-yourself approach, follow these tips:
* Use a privacy
manager on your telephone service to screen creditor calls so that
you only speak to creditors when you're ready.
* Make sure you
have a solid game plan for building up money to settle with, and
set the funds aside in a separate bank account.
* Do not send
settlement funds until you have the deal in writing. No
* After paying
the settlement, follow up to obtain a zero balance letter from the
creditor, so you don't have bogus collection problems later on.
* Know your
rights as a consumer by reading the free resource articles on
debt, credit, and collections at the Federal Trade Commission
* Don't be
intimidated or pressured into accepting a settlement deal that you
thousands of people settle their own debts every year, without need
for lawyers or bankruptcy. You can do it too if you're disciplined,
determined, and prepared to ignore some of the crazy stuff that bill
collectors say. When you're finally debt-free, you'll feel a lot
better about having worked it out on your own. Good luck on your
road to debt freedom!
Charles J. Phelan
has been helping consumers become debt-free without bankruptcy since
1997. A former senior executive with one of the nation's largest
debt management firms, he is the author of the Debt Elimination
Success Seminar™, which provides
comprehensive instruction in do-it-yourself debt settlement that
saves $1,000s in fees.
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