Debt Settlement
Credit Card Debt: $
News Icon

Debt Relief

View All

Mortgage Brokers & Lenders Directory

You can search our directory or Mortage Brokers & Lenders and get a current quote on 30 year fixed mortgage rates as well as current mortgage interest rate for other loan programs.

Mortgage Brokers:

Debt Settlement vs Bankruptcy

Written By:
July 13, 2010 at 4:34 PM

Debt settlement entails, precisely as it sounds, the agreement between a creditor and debtor to pay less than the full amount of debt owed. The debtor agrees to pay the reduced amount while the creditor agrees to consider that reduced amount a payment in full. Only unsecured debts can be settled (creditors secured by collateral will simply foreclose/repossess the collateral, and thus, have no need to negotiate or settle).

Credit Card Debt Negotiations

Creditors will never negotiate with a debtor currently paying the debt. Creditors will only negotiate when a debtor stops paying the debt, causing the balance to grow due to accrued interest, penalties and late fees. Once this occurs, creditors will begin to negotiate and ultimately agree to settle debt because they prefer to collect some portion their money through settlement rather than none of it in a bankruptcy. Furthermore, accounting laws force creditors to begin marking down the value of unpaid debts, so from their standpoint, they have already assumed losses. Finally, alternate forms of collection include legal and collection fees render settlement far more profitable for creditors.

Regardless, creditors often sell bad debt at a discount to collection agencies and junk debt buyers. As you can imagine, these entities can prove even more amenable to negotiation as any recovery greater than their cost to purchase the debt provides them a profit.

Key Considerations in Debt Settlement

Generally, the debtor must pay the agreed settlement in one lump sum. So debtors must either possess the sum before entering negotiation or use the time period in which they have stopped paying the debt to save that sum (generally through non-payment of the debt.) This makes financial sense because, as you know, most of your credit card payments include high fees and interest. Stopping to pay monthly payments allows you to save that money for months; and, when the settlement day arrives, you can apply those savings to the discounted principal rather than paying it towards fees and interest for years and years.

Debt Settlement vs Bankruptcy

Both the process of stopping monthly payments and settling your debt will reflect negatively on your credit reports. However, these damage your credit far less than would a bankruptcy. Furthermore, a bankruptcy will last on your credit report for a decade, whereas late/no payments and debt settlement will generally last for half of that time. Also, through court background checks, banks evaluating you for large personal or corporate loans can find bankruptcies even after they no longer appear on your credit report. Finally, you can negotiate, as part of a settlement, that your lender report the debt to the credit reporting agencies as paid in full rather than settled. In fact, you can even negotiate that the lender instruct the credit agencies to delete any mention of the account form your credit report. I conclude that debt settlement is a far better option then credit card bankruptcy.

Lastly, the IRS treats as taxable any debts or portions of debts cancelled outside of the bankruptcy process (because it’s basically income to you). So be prepared to pay income tax on the forgiven amounts that exceed a total of $600.





More About Debt Relief
Please sign-in with Facebook.

Debt Relief
Alabama Debt Relief Illinois Debt Relief Montana Debt Relief Rhode Island Debt Relief
Alaska Debt Relief Indiana Debt Relief Nebraska Debt Relief South Carolina Debt Relief
Arizona Debt Relief Iowa Debt Relief Nevada Debt Relief South Dakota Debt Relief
Arkansas Debt Relief Kansas Debt Relief New Hampshire Debt Relief Tennessee Debt Relief
California Debt Relief Kentucky Debt Relief New Jersey Debt Relief Texas Debt Relief
Colorado Debt Relief Louisiana Debt Relief New Mexico Debt Relief Utah Debt Relief
Connecticut Debt Relief Maine Debt Relief New York Debt Relief Vermont Debt Relief
Delaware Debt Relief Maryland Debt Relief North Carolina Debt Relief Virginia Debt Relief
District of Columbia Debt Relief Massachusetts Debt Relief North Dakota Debt Relief Washington Debt Relief
Florida Debt Relief Michigan Debt Relief Ohio Debt Relief West Virginia Debt Relief
Georgia Debt Relief Minnesota Debt Relief Oklahoma Debt Relief Wisconsin Debt Relief
Hawaii Debt Relief Mississippi Debt Relief Oregon Debt Relief Wyoming Debt Relief
Idaho Debt Relief Missouri Debt Relief Pennsylvania Debt Relief