Many of my clients attempt some type of debt settlement prior to seeking bankruptcy assistance.  Unfortunately, my clients learn the truth of the adage that what appears to be too good to be true usually is.

Debt settlement is where a creditor accepts less than full payment and in exchange for a lump sum payment will consider the debt settled in full.  Usually, if you can make a lump sum payment of 25% to 50% of the total debt owed, the creditor will consider the debt satisfied.  Thus, a $10,000 debt can be settled for $4,000.

However, it's just not that simple:

  1. Creditor will not accept a payment plan.  If my clients can afford to make a large lump sum payment, they would be making the minimum payment.
  2. Creditor will issue a 1099 for the foregiven debt.  Nothing is free in our society, and neither is debt that is foregiven.  The creditor is going to issue a 1099 for the debt that it "foregives".  Now, my clients end up owing taxes on the foregiven debt to the IRS and Comptroller of Currency.  So the 40 cents on the dollar settlement quickly turns in to 70 cents on the dollar when you consider the tax consequences.
  3. Creditor will probably sell the foregiven debt to a third party to seek repayment.  Often, Creditors will not issue a contract outlining the terms of settlement.  Without a release / contract from the creditor acknowledging satisfaction of the entire debt, my clients end up being sued by a collection agency for the foregiven debt.  It is then my client's word against the word of the collection agency that there was an agreement satisfying the debt.  A money judgment can be entered in favor of the collection agency and then 25% of my client's gross wage is garnished to pay the remaining portion of the "forgiven" debt.

If you are considering debt settlement, we recommend you contact us to discuss all of your options first.  We can evaluate your situation and give you an unbiased assessment of the best way to proceed.  We can also negotiate with the creditors to make sure your rights are protected. 

For more information, call us at (410) 766-1100 to schedule an appointment.