Debt Settlement — Why the Critics Are Wrong

A lot more people are becoming interested in debt settlement as an different to bankruptcy. Thats because a new bankruptcy law was enacted on October 17, 2005, and it method 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 position, where the unsecured debts are totally wiped away. That has changed under the new rules. If your income is above the median for your state, or you can pay back at the minimum $100 per month toward your debts, then youll be turned down for Chapter 7. Instead, youll 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 proven expenses. So already if you dont think you can pay $100 a month or more, the estimate 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. Thats where debt settlement starts to look pretty attractive.

Yes, I know debt settlement has its critics. Ive criticized aspects of the industry myself. But what the critics dont seem to understand is that this approach is for people who would otherwise go bankrupt! Lets examine the three main complaints against debt settlement and see where the critics are missing the mark.

Debt settlement has a negative impact on your credit score.

Wow. Big deal! Pretend its two years from now. Would you rather have an A+ credit rating or be totally free of debt? Pick one please, because you cant have both. All debt reduction programs have a negative impact on credit scores. Thats why only people who truly cant keep up with their bills should go into one of these programs. But its pointless to worry about your credit while youre being crushed with debt. Thats 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.

Ive always been amazed at how frequently this lame criticism is repeated in article after article. Yes, its possible that you may need to pay taxes on forgiven debt balances, but the odds are against it. Thats because the IRS allows insolvent taxpayers to exclude canceled debts. So unless you have a positive net worth, you probably wont need to pay taxes on your settlements. And already if you did, so what? Youd be paying taxes because you saved a bunch of money off your debts! And this is a problem?

Collection 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 whats 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 the minimum debt settlement allows the consumer to use the collection course of action to eliminate debt by negotiated compromises. already 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, character lien, or bank levy is without of financial resources with which to settle. And if thats the case, the debtor should be talking to a bankruptcy attorney anyway.

In contrast, lets 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 is much more difficult to accomplish now that the new law is in effect).

2. You can get out of debt in 2-3 years, and much faster if there is some obtainable 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 time of action more than with any other approach.

4. You continue 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 by your financial problems. Bankruptcy nevertheless feels like failure to a lot of people. Debt settlement represents an honest and ethical different to that extreme solution.

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 wont 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 youve made the determination that debt settlement makes sense for your situation, youll need to decide whether to go it alone or seek specialized assistance. For people who arent easily intimidated, theres no question that the do-it-yourself approach is the way to go. For others who cant manager the least bit of pressure or just want to focus their time and energy in other places, hiring a specialized 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 youre ready.

* Make sure you have a substantial 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 exceptions!

* After paying the settlement, follow up to acquire a zero balance letter from the creditor, so you dont 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 website: http://www.ftc.gov

* Dont be intimidated or pressured into accepting a settlement deal that you cant manager.

Remember, thousands of people settle their own debts every year without the need for lawyers or bankruptcy. You can do it too if youre disciplined, determined, and prepared to ignore some of the crazy stuff that bill collectors say. When youre finally debt-free, youll feel a lot better about having worked it out on your own.