Is it Worth Settling My Debt to Avoid Bankruptcy?



Bankruptcy seems like a great idea but most people are scared of the “consequences.” 

“It’s on my credit report forever.” 

“I’m not allowed to have credit again.”

“I’ll need a co-signer to even rent an apartment.”

The list of so-called consequences goes on and on. However, what about settling debt outside of bankruptcy? Are there consequences to doing so? Spoiler Alert: yes! Here is a short list of how credit consolidation and credit negotiation may affect your credit score..

Settling will Often Mean Starting from Behind

One day, you look up and suddenly, the credit card debt is more than you can handle. It’s almost as if the credit card companies wanted it to happen that way! At any rate, regardless of how, it is important to recognize the problem. When even paying the minimum payment has become a struggle, that’s when it’s time to look for creative solutions. The first place to turn is the credit card companies themselves. However, often, its hands are tied to help until there is something that triggers the necessity, such as a job loss or medical emergency. If no “trigger” situation occurs, then the credit card representatives often suggest falling behind by a month, two or even three months so that there is a delinquency to “trigger” its ability to negotiate. The poor unfortunate souls who do follow their instructions have now affected their credit scores negatively and often put themselves at a disadvantageous position. The worst part? The credit card companies made no promises and sometimes, even after the delinquency occurs, refuse to work with the debtor. Now, the debtor has left themselves vulnerable for lawsuits, garnishments and frozen assets.

Settling Debts is NOT Straightforward

Most people have a diverse portfolio of debt. What does this mean? Settlement results and methods may vary. Student loans, for example, will often have payment plans based on whether they are private or public loans. The IRS has offers in compromise that differ from state agencies. Each credit card company has a different set of rules, regulations, representatives and attorneys. Bottom line: Where you have luck with one does not mean that you will have luck with the others. Thus, it is a lot of work with a lot of different parties to truly negotiate debt. Develop a strategy or you may pay not only in money but in a more precious commodity: Time. 

Settlement results in Tax Consequences

Let’s say a credit card company “forgives” a $5,000 debt. Sounds like a great day, right? However, at the end of the year, the same debt is given right back to you in the form of a 1098 Form. What does it mean? The IRS treats any debt forgiven outside of a bankruptcy as taxable income. This means that whatever debt is forgiven must be added to your gross income for the tax year. This means more taxes for you. In most cases, it is of only some consequence, but imagine putting in all the time and effort to get the best deal on each loan, only to end up with thousands in tax consequences. 

For Help with your Debt Management, TEXT “SLF” to (312) 620-6499

It’s tricky to manage debt. It’d be nice to talk to someone about it before embarking on the journey to fiscal stability. That’s where SLF can help. Call us today for a free evaluation at (312) 620-6499 to talk about strategies to help you and your family sleep better, live better and tame that debt!