6 Questions To Answer Before Settling Your Debts

I get dozens of questions each day from potential clients, but the top question when it comes to bankruptcy is this:
Isn’t it a better idea to settle my debts instead of filing for bankruptcy?
Sadly, there’s no right or wrong answer to that question. For some people, filing for bankruptcy makes the most sense. For others, debt settlement is the weapon of choice.
Here are some of the considerations you should take into account when making the decision between filing for bankruptcy and engaging in debt settlement.
How many debts do you have? If you’ve got only 1 or 2 outstanding obligations then it makes sense to look into debt settlement before bankruptcy. With fewer open accounts, it’s easier to negotiate settlements. When you’ve got a large number of creditors, it’s tougher to get them all to fall into line.
What types of debts do you have? Some creditors will talk settlement, others won’t. Credit card companies, for example, may be willing to accept an amount lower than what’s due to pay the debt in full. Federal student loans, however, don’t settle that often.
Do you have the money to settle your debts? When a creditor agrees to a settlement there’s usually a requirement that the funds be paid immediately or within a few months. Without the money to spend on a settlement, negotiations won’t get you very far.
Can you live with the tax fallout? A creditor who agrees to forgive more than $600 of the balance due is required to send you a Form 1099 at the end of the year, and you may have to pay taxes on the forgiven amount. There are some situations where you can get out of the tax obligation, but you definitely want to sit down and talk with your tax professional before making the decision to settle your debts.
What’s the impact of settlement? When you settle a debt for less than the amount due, your credit report is updated to reflect that fact. The settlement notation can remain on your credit report for up to 7 years.
Do you need the money? Even if you’ve got the cash to fund a settlement of your debt, you need to consider the others uses that may exist for that money. Whether it’s a savings account for retirement, emergencies, or home repairs it’s important to remember that settlement is going to hit you in the wallet so plan accordingly.
Deciding to settle your debts rather than filing for bankruptcy may seem like a good idea on its face – and for you, it may be the right decision. Before making that choice, however, you need to weigh all your options and come to the decision that makes the most sense for you.