Revisiting Debt Settlement (Again?)

07 May Revisiting Debt Settlement (Again?)

Wipe Out Debt

Recently I ran across this post discussing the difference between bankruptcy and debt settlement. I believe that there are a few items that need to be corrected with regards to the information contained in this post.

Before we go any further, it may be useful to talk about what bankruptcy is and what a debt settlement is.

Bankruptcy is a legal proceeding where a petition is filed with a bankruptcy court. After certain proceedings through either a chapter 7 or chapter 13 filing (typical for most consumer debtors), debts are often discharged meaning that you are no legally obligated to pay those debts. Your case is monitored by a bankruptcy judge and the court’s orders can be enforced through various means.

A debt settlement is a voluntary arrangement between you and a creditor where the creditor will accept less than full payment usually in a lump sum payment or in a limited number of payments. The creditor will then cancel or forgive the remaining amount of the debt and you are no longer obligated to pay it. One thing to remember about debt settlement is that it is a voluntary agreement. The creditor does not have to accept your settlement offer. One other point about debt settlement is that if a debt is settled, the creditor will most likely issue a Form 1099 for the balance of the debt forgiven or cancelled. This will be reported to the IRS as income to you and it could affect your tax liability. But see Form 982 and instructions.

The post goes on to talk about that bankruptcy proceedings are costly. As a general rule and of course, circumstances differ in individual cases, bankruptcy cases are far less expensive than debt settlement. Oftentimes, for most consumer debtors, a chapter 7 case is considered a “no asset” case meaning that there are no assets belonging to the debtor that are sold in order to pay creditors. Typically, a chapter 7 case can be accomplished for $3,000 or so including the costs. For a chapter 13 case, the attorney’s fees are higher and there are trustee’s commission and potentially adequate protection payments to creditors for secured creditors.

But, for terms of comparison, the poster states that he has approximately $90,000 in credit card debt. Assuming that there are no “non-exempt” assets, and no other issues, a bankruptcy case could be completed for costs of approximately $3,000.00. For a debt settlement and all creditors take 40% and not counting any attorney’s fees or the like, you would pay $36,000.00. In addition, you could face a tax liability for the $54,000 in debt that is cancelled and attributed as income to you.

In terms of expense, particularly when comparing bankruptcy versus debt settlement, most times bankruptcy is far, far cheaper. With regards to credit reports, a bankruptcy will be reported for ten years but, once a chapter 7 case is over and the debt discharged, the credit reporting agencies must report the debts as “$0” balance so your credit score may actually improve (debt-to-income ratio is one component in your credit score).

One piece of advice I absolutely agree with–if you are having issues with too much debt, consult an experienced attorney. We can go over options and choose an option that would be most beneficial and cost-effective.




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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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