Debt Settlement or Bankruptcy

Many of my conversations with bankruptcy clients begin as discussions about potential debt settlement. Clients have a desire not only to avoid bankruptcy if possible, but also to repay whatever amount of their debt they are able, through debt settlement. Unfortunately, this option is rarely successful.

Settling A Debt

Essentially, the debt that exists between an individual and a creditor is based on a contract. Both parties can agree at any time to alter that contract—and the amount owed—and that’s what happens in debt settlement. The creditor agrees to take less than the owed amount, in exchange for forgiving the remainder of the debt.

Three Incentives To Settle

  1. Get creditors off your back—with a debt settlement agreement reached, the client no longer has the stress of being hounded by the creditor.
  2. Avoid bankruptcy—clients are scared their credit score will never bounce back from a bankruptcy and so debt settlement looks to be a better solution.
  3. Feel good in the end—with debt settlement, a client can feel good because the creditor agreed to the negotiated amount. It was a ‘fair’ deal for all.

Filing Bankruptcy Instead

When a client files bankruptcy, the same general unsecured debts referenced above, are discharged in their entirety. The cost to bankruptcy of course includes attorney fees and the hard work required to rebuild your credit after. So often, after a conversation comparing the two options—both of which I’m happy to represent clients for—the client decides on filing a bankruptcy. It just makes sense considering the overall relief bankruptcy provides over debt settlement.

Three Incentives to File Bankruptcy Instead

  1. No Tax Consequences—with debt settlement, the client will receive a 1099-C for forgiveness of income for whatever amount the creditor agreed to ‘let go’ as part of the settlement. This gives rise to a tax obligation which needs to be treated as part of the expense of debt settlement.
  2. The Broad Reach of Bankruptcy—when a client files bankruptcy, not only is one debt discharged in full, but all other debt (with few exceptions) is also discharged. The client truly gets a fresh start. For less money required to settle the typical unsecured debt, you get ALL of your unsecured debt discharged in bankruptcy.
  3. Protection From The Court—the bankruptcy court offers strong relief for qualified debtors, and in exchange for your honesty in the papers you file with the court, you get protection against creditors which can be exercised in the federal court should a creditor refuse to abide by the rules of bankruptcy.

Call An Attorney

Let us simplify bankruptcy for you. Call 704.749.7747 to discuss your options with a bankruptcy attorney. You deserve to understand your options and we’re here to help.