Debt Settlement
Many consumers have trouble with only a few creditors. In that situation, bankruptcy may not be necessary and it may be possible to settle the debts. Debt settlement is usually only possible if you have a limited number a debts you need to settle, you have sufficient funds to pay off a portion of the debts (usually around 50%), and you can afford to pay the increased taxes on the forgiven debt. One of the big disadvantages of settling your debts rather than declaring bankruptcy is that you will have to count the forgiven debt as income on your next tax return. The creditor will report the information to the IRS. Another disadvantage is the risk that you may not be able to settle all of your debts. If you settle with some of your creditors, but not all, you may end up needing to file bankruptcy anyway after paying some of your creditors a significant amount of money.
Don’t get scammed by out-of-state debt settlement companies.
The most common problem I see people have with debt settlement is that they were scammed by an out-of-state debt settlement company. The Consumer Financial Protection Bureau warns consumers about “risky” debt settlement companies that over-promise and under-deliver. I have seen people who have paid tens-of-thousands of dollars to debt settlement companies with nothing to show for it, only to need to file bankruptcy anyway. Debt settlement companies also cannot give you legal advice about whether a debt is still valid. A debt settlement company may try to settle a debt that can no longer be collected because the statute of limitations has expired. Statutes of limitations vary by state, so you should consult a local attorney. A local bankruptcy attorney can advise you of all your options and help you evaluate whether you can settle your debts to avoid bankruptcy.