Bankruptcy is certainly not your only solution when you are struggling with debt. However, radio and TV commercials for debt settlement companies and pronouncements from financial gurus that “bankruptcy is bad” doesn’t offer much guidance.
As a licensed Georgia attorney, I have an ethical responsibility to my clients to consider all possible options before offering legal advice. Sometimes, for example, your best course of action may be to do nothing. If the debt collection statute of limitations is about to run and you have not heard anything from your creditor in months or years, inaction is probably your correct move.
Similarly, there are many situations where bankruptcy won’t offer much benefit. If your debt consists primarily of non-dischargeable tax debt, student loans, criminal restitution or debt arising from fraud, bankruptcy will offer little help other than to buy you a few weeks or months. In these situations, payment plan negotiation with creditors is likely your best option.
Many times, however, you do have the option of pursuing bankruptcy relief, or choosing debt negotiation. For some folks, there is a moral dimension to this choice – and that is a perfectly legitimate concern to include in your evaluation. And while moral and religious objections to bankruptcy are beyond the scope of what I do, I would point out that personal finance advocates like Dave Ramsey who include religious sensibilities in their approach to debt relief do recognize that bankruptcy can be the preferred response to your unmanageable debt crisis.
I recently came across as very insightful article published on the personal finance site NerdWallet.com. Written by columnist Liz Weston, this article points out some of the disadvantages to debt settlement in comparison to bankruptcy.
Negatives of Debt Settlement
Debt settlement, for example, can be much more expensive than bankruptcy. If you are trying to settle $75,000 of credit card debt and you are able to negotiate a lump sum payment for 25% of this debt, you would need $18,750 in cash. By comparison, a Chapter 7 bankruptcy will cost you around $2,000.
Debt settlement may generate tax liability as debt forgiveness may be treated as ordinary income.
Debt settlement can take months or years, since debts are bought and sold and it can be difficult to find a person in authority to speak with. And you cannot assume that Company ABC’s acceptance of your money will be communicated to debt buyer Company XYZ who may try to come after you for the remaining balance.
Lingering debt settlement may also cause more damage to your credit than bankruptcy, which is generally over in about 5 or 6 months, with credit bounce back by month 12.
Debt Settlement Scams
And perhaps the biggest concern I have with debt settlement concerns the vendors who offer these services. While there are some legitimate providers of debt negotiation services there are a troubling number of fraudulent, overpriced or unqualified purveyors of these services who claim to know the “secrets the credit card companies don’t want you to know.” Before signing anything with any of these companies, type in “CFPB lawsuits against debt settlement companies” and do your own research (the CFPB is the Consumer Financial Protection Bureau – an agency of the federal government).
At the very least, be very careful and very selective before paying anything to any of these companies. And in case you are wondering, there is no black book of secrets that the credit card companies are desperately trying to keep hidden.
Whether you choose to sit tight and do nothing, negotiate a reduced settlement with one or more creditors, employ a debt negotiation vendor, or choose to learn about bankruptcy, you should recognize that there are no one-size-fits-all solutions. Your job, when considering options, is to educate yourself about the various options and make an informed, rational decision.
