Personal Finance and Money Management

There are a variety of options other than bankruptcy, however it is imperative that you discuss the pro’s and con’s of these other options with a qualified consumer attorney before jumping into anything. While there are many ways to address unsecured debt absent a bankruptcy filing, the following 2 options are the most common:

Debt Consolidation: Debt consolidation is a process whereby creditor’s generally agree to reduce interest rates and accept a smaller monthly payment so that all creditors can be dealt with in a single payment. The benefit here is obviously a consolidated debt load and reduced interest. The downside is that in order for this to be an effective tool, all of your creditors must agree to participate or else you could be left having to deal with individual creditors outside the consolidation process. Many of these consolidation companies are extensions of the credit card companies designed to squeeze out of you your last few dollars. It is recommended that anyone seeking the services of a debt consolidator who is not an attorney, ensure that they are a non-profit organization.

Debt Settlement: Debt settlement is a process where each creditor is contacted individually in an attempt to settle the account for less that the full balance. In order to effectively participate in debt settlement, the consumer must have access to lump sums of cash. Whereas in debt consolidation creditors are paid with monthly payments, with debt settlement, the best settlement offers you will receive involve lump sum offers. While payment plans here maybe an option, they will uniformly require a higher overall percentage of the balance. It is also recommended that your accounts be delinquent before pursuing this option because if money is being paid to the creditor on a monthly basis, the less incentive they will have to settle. Debt settlement may be a better option than bankruptcy in the situation where an individual would lose significant property by filing bankruptcy or if there income is such that filing bankruptcy would force them to pay a higher dividend to creditors than the debt could be settled for. 

The benefit here is that you are reducing the principal balance of what you owe. The downside is your credit will reflect the account was settled for less than the full balance, which is a derogatory mark on your credit. Also, creditors will issue you a 1099-C at the end of the year for the forgiveness of debt if the amount forgiven is in excess of $600.00. The debt forgiveness is treated as taxable income requiring that taxes be paid on the forgiven amount. Depending on the amount of debt you reduce, the taxes could be significant. It is recommended that you consult with a professional to determine whether this is a good fit for your current financial situation.