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A large portion of calls our firm receives comes from callers wanting to know whether DEBT SETTLEMENT is a better option than BANKRUPTCY.  Most callers have seen advertisements that claim that 90% of your debt can be wiped out through debt settlement programs without declaring bankruptcy.  Furthermore, these advertisements also claim that you can make low monthly payments to settle these debts over 2-4 years.  Wow – that all sounds great, but what is the TRUTH regarding these so-called debt settlement programs?

What is Debt Settlement?

Simply put, Debt Settlement is the process of settling your debt (primarily unsecured credit card debts) for LESS than the amount you owe.  For example, if you owe $20,000 in credit card debt, you are seeking to SETTLE that debt for LESS than that amount, usually for much less.  So, for instance, if you settle $20,000 for $10,000, you have settled that debt for 50% of what you owe, and if done properly, the remaining 50% is forgiven, or wiped out.

To properly settle your debts for less than you owe, you ideally want to have CASH available which you can use to pay the settlement amount at once, which also gives you better leverage in settling your debts quickly and more cheaply.  So for instance, if you have $7,000 available in cash, you can contact your credit card company and tell them that you are willing to settle your $20,000 debt for $7,000, and tell them that you can pay in cash immediately.  Given the current economic conditions and the trouble banks are in, they may be highly likely to consider your offer and settle your debt.

Now, let’s talk about those debt settlement companies that advertise you can make low monthly payments and settle for debt for 10% of what you owe – saving 90% !  Sounds too good to be true – IT IS!  Here are the facts:

1) The monthly payments you are making to them DOES NOT go directly to the credit card balances, but they are put in a “savings account” where they sit until there is enough money for these companies to then approach your credit card companies and try to settle the debts,

2) The first 3-12 payments go ONLY to pay for the fees for these companies.  In fact, the average rate these debt settlement companies charge you is 15% of the total balance of your debt!  And most of the time, they do not disclose this because it is simply highway robbery.  Thus, your “savings” account does not even begin accumulating any money at least until several months after you begin the program.

3) Credit Card companies will NOT settle your debts or negotiate anything unless you are in default (you have stopped making payments).  In fact, if you are barely making minimum payments and on time – you are the best customer for the credit card companies.  So beware if anyone, including lawyers, tell you to stop making payments so they can help you – that is ILLEGAL.  And if you default on your payments, your credit score will obviously suffer, perhaps as much as if you declared bankruptcy.  If you enter a debt settlement program thinking that your credit score can be saved while settling your debts for pennies on the dollar – you are mistaken.

4)  Regarding the advertisements that claim that you can save 90% of your debts.  Well, this is only partially true.  This usually occurs when your debts are so old (perhaps 4+ years old) and have been sold from one collection agency to another and to another, that by this time, ANY recovery would be good to the holder of your debt.  It is also important to note that after 4 years from default, your creditors cannot sue you in court to collect those debts.  So, if your uncollected debts are over 4 years old and there is no judgments issued, a collector would be happy to get 10% of the debt, since there is no further recourse.

5) You can DO THIS YOURSELF.  Given the current economic crisis, the banks have become a little more flexible in actually talking to their cardholders and trying to work something out.  If you are months behind on your payments and you have the means to pay some of the money, call your bank and tell them that you want to settle the debt.  Most likely, you will get an offer for a small discount, but don’t stop there – ask for a much larger discount and chances are you will get them.

Why Bankruptcy May Be a Better Option

Bankruptcy may be a better option, because of the following reasons:

1. You may not have any money left to attempt to settle your debts.
2. Most people who start a debt settlement program DO NOT complete it, because they cannot afford to make those payments after a while.  By the time you realize this, you may have paid thousands of dollars into a settlement program which you could have kept even in bankruptcy under applicable exemption rules.
3. Bankruptcy would wipe out your unsecured debts, without having to pay them back.
4. Taxes – If you settle your debts, the credit companies report the settlement to the IRS, and you would be liable for taxes on the amount of debt that was forgiven.  This forgiven amount is considered income.  While currently there is a break on this taxation, it will most likely come back soon.
5. You may have other debt issues, such as judgments, lines of credit, secured loans, SBA loans, etc. which may not be settled.  Bankruptcy can take care of all these.
6. While Bankruptcy stays on your credit report for 10 years, defaulted credit card or other debt records may stay on your report for 7 years.  Thus, given the benefits that bankruptcy provides, it may be a better option.

Since each situation is unique, please contact our office to discuss your case.  This information is intended only as general information.

Thomas Suh

HOPE LAW GROUP

(213) 670--0068