Debt settlement and bankruptcy go hand in hand. As a result, I routinely speak with clients about pursuing both options, depending upon the specific circumstances. Depending upon the client’s needs, we may choose to pursue debt settlement over bankruptcy. My goal in each of those conversations with a client is to understand what’s at stake for the client, their objectives, and how likely we are to succeed in debt settlement or bankruptcy.
Is Debt Settlement An Option?
Debt settlement is always an option. The question is whether the creditor agrees with your valuation of the debt. You’re obviously asking them to settle the debt for less than “full value.” Depending upon the creditor, the amount, and their tendency to settle, you’ll get different answers from different creditors.
One impediment to settling debt is your ability to send the creditor a lump sum payment. We are able to generate the best offer from the creditor when we can guarantee them they will have their funds quickly after settlement. While some creditors will agree to a reduced amount to be paid over time, most creditors involved in a debt settlement negotiation require a lump sum payment in full. One exception to this is where a creditor will accept a portion of the reduced amount quickly on the heels of the settlement, with the remainder to be paid over time in installments.
Do I Need To Qualify For a Chapter 7 Bankruptcy?
No. While a Chapter 7 bankruptcy is a complete liquidation of debt, even a Chapter 13 bankruptcy—which is available to almost everyone—gives the creditor a result where they are only getting paid a small percentage of the debt over time. As compared to having their debt put into a Chapter 13 bankruptcy, most creditors will offer a reasonable reduction in the amount of the debt.
What If We Can’t Settle The Debt?
The firm typically simultaneously negotiates with creditors while preparing bankruptcy documentation for you. If we are unable to successfully negotiate a debt settlement, we can proceed with a bankruptcy filing provided it meets your objectives.
Are There Tax Consequences To Debt Settlement?
While the standard answer is “You should talk to your CPA,” generally speaking when a lender cancels or forgives a debt, there is a possibility that forgiveness of debt will generate taxable income due to the IRS. Generally, clients find that the benefit of the reduction in the principal amount of the debt, combined with settling the debt once and for all with the creditor outweighs any potential for taxable income resulting from the debt settlement.
If you have a question about debt settlement, give us a call at 704.749.7747. We’re here to help.