Debt Settlement -- Why the Critics Are Wrong - Debt-Relief

Debt Settlement -- Why the Critics Are Wrong

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!

Charles J. Phelan has been helping consumers become debt-free without
bankruptcy since 1997. A former senior executive with one of the nation's
largest debt settlement firms, he is the author of the Debt Elimination
Success Seminar?, a five-hour audio-CD course that teaches consumers how
to choose between debt program options based on their financial situation.
The course focuses on comprehensive instruction in do-it-yourself debt
negotiation & settlement designed to save $1,000s. Personal coaching and
follow-up support is included. Achieves the same results as professional
firms for a tiny fraction of the cost. http://www.zipdebt.com/article3

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