After October 17, 2005, a lot of people are going to become
interested in debt settlement as an alternative to bankruptcy.
That's the date the new bankruptcy law goes into effect, and it
means a rude awakening for many consumers seeking a fresh start
in bankruptcy court.
It used to be that 7 out of 10 people filing personal
bankruptcy were granted Chapter 7 status, where the unsecured
debts are totally wiped away. That will change under the new
rules. If your income is above the median for your state, or
you can pay back at least $100 per month toward your debts,
then you'll be turned down for Chapter 7. Instead, you'll be
shifted into Chapter 13, where you pay back a portion of the
debt over 3-5 years.
It gets worse. When the court calculates your allowable living
expenses, it will use the approved IRS schedules, not your
actual documented expenses. So even if you don't think you can
pay $100 a month or more, the judge will probably disagree.
Instead of a fresh start, many people will be faced with the
grim reality of a harsh 5-year plan, on a court-mandated budget
that forces them to adopt a much lower standard of living.
That's where debt settlement starts to look pretty attractive.
Yes, I know debt settlement has its critics. I've criticized
aspects of the industry myself. But what the critics don't seem
to understand is that this approach is for people who would
otherwise go bankrupt! Let's examine the three main complaints
against debt settlement and see where the critics are missing
the mark.
"Debt settlement has a negative impact on your credit score."
Wow. Big deal! Pretend it's two years from now. Would you
rather have an A+ credit rating or be totally free of debt?
Pick one please, because you can't have both. All debt
reduction programs have a negative impact on credit scores.
That's why only people who truly can't keep up with their bills
should go into one of these programs. But it's pointless to
worry about your credit while you're being crushed with debt.
That's like worrying about how the yard looks after your house
has burned down.
"You might have to pay taxes on the canceled portion of the
debt."
I've always been amazed at how frequently this lame criticism
is repeated in article after article. Yes, it's possible that
you may need to pay taxes on forgiven debt balances, but the
odds are against it. That's because the IRS allows insolvent
taxpayers to exclude canceled debts. So unless you have a
positive net worth, you probably won't need to pay taxes on
your settlements. And even if you did, so what? You'd be paying
taxes because you saved a bunch of money off your debts! And
this is a problem?
"Collection activity will continue and you might get sued."
Yes, if you fall behind on your bills, your creditors will most
certainly continue attempts to collect what's owed, and one or
more of those creditors might sue you in civil court. But
again, this criticism totally misses the mark. Collection
activity is already a function of being in debt trouble. At
least debt settlement allows the consumer to use the collection
process to eliminate debt through negotiated compromises. Even
lawsuits need not be cause for panic, since they can often be
settled out of court. The only reason to allow a legal action
to proceed to the point of wage garnishment, property lien, or
bank levy is lack of financial resources with which to settle.
And if that's the case, the debtor should be talking to a
bankruptcy attorney anyway.
In contrast, let's look at some of the positives of debt
settlement.
1. You can save $1,000s versus any other method of debt
elimination (except for Chapter 7 bankruptcy, which will become
difficult to accomplish after the new law takes effect).
2. You can get out of debt in 2-3 years, and much faster if
there is some available home equity to work with. This is a lot
better than 5 years in the financial boot camp of Chapter 13
bankruptcy, or 5-9 years in a credit counseling program.
3. You keep control over the process more than with any other
approach.
4. You maintain personal privacy. With bankruptcy, your case
file becomes a matter of public record, easily located via
Internet search by future employers, landlords, or creditors.
5. You retain your dignity while working through your financial
problems. Bankruptcy still feels like failure to a lot of
people. Debt settlement represents an honest and ethical
alternative to that extreme solution.
6. You can adjust your monthly funding into the settlement
program up or down depending on real-world conditions in your
financial life. If your income fluctuates from one month to the
next, or you get hit with an unexpected expense, it won't
torpedo the whole program. The built-in flexibility of debt
settlement gives it a huge advantage over other options, all of
which require a fixed monthly payment.
Once you're made the determination that debt settlement makes
sense for your situation, you'll need to decide whether to go
it alone or seek professional assistance. For people who aren't
easily intimidated, there's no question that the do-it-yourself
approach is the way to go. For others who can't handle the
least bit of pressure or just want to focus their time and
energy elsewhere, hiring a professional settlement company may
be the correct choice.
If you do decide to take the do-it-yourself approach, follow
these tips:
* Use a privacy manager on your telephone service to screen
creditor calls so that you only speak to creditors when you're
ready.
* Make sure you have a solid game plan for building up money to
settle with, and set the funds aside in a separate bank account.
* Do not send settlement funds until you have the deal in
writing. No exceptions!
* After paying the settlement, follow up to obtain a zero
balance letter from the creditor, so you don't have bogus
collection problems later on.
* Know your rights as a consumer by reading the free resource
articles on debt, credit, and collections at the Federal Trade
Commission website, (www.ftc.gov).
* Don't be intimidated or pressured into accepting a settlement
deal that you can't handle.
Remember, thousands of people settle their own debts every
year, without need for lawyers or bankruptcy. You can do it too
if you're disciplined, determined, and prepared to ignore some
of the crazy stuff that bill collectors say. When you're
finally debt-free, you'll feel a lot better about having worked
it out on your own. Good luck on your road to debt freedom!
About The Author: Charles J. Phelan has been helping consumers
become debt-free without bankruptcy since 1997. A former
executive in the debt settlement industry, he teaches the
do-it-yourself method of debt negotiation. Audio-CD material
plus expert personal coaching helps consumers achieve
professional results at a fraction of the cost.
http://www.zipdebt.com
