Negotiating Debts Seldom a Complete Solution

As satisfying as it would be to settle with your creditors, it doesn’t usually offer a comprehensive solution to debt problems.

Almost everyone I meet in my bankruptcy practice repeats how they’d like to pay their creditors but can’t make an acceptable deal with most creditors. Often they report that attempts to compromise the debt results in an increase in the interest rate or worse.

More importantly, my experience is that a certain percentage of creditors will hold out for an unaffordable pay off.  If the hold outs are significant and the remaining debt balance blights your financial future, then the dollars spent settling with the more agreeable creditors are essentially wasted.

The price of settling with a credit card creditor tends to go down as the debt gets older.  So, the longer you can resist the collection assault, the cheaper settlement is.  Most settlements contemplate a lump sum payment at the agreed price.

What worries me, as a lawyer, is the collector doubling back on a settlement, after you’ve sent the money.  I’ve heard excuses for such behavior as including:  he wasn’t authorized to make a settlement;  he doesn’t work here anymore; and, we have no record of the  deal.  Whatever the excuse, the collector  keeps the money and continues collection.

Another gotcha in settling debts is that the amount forgiven is reported to the IRS as income just as though you had received it in cash.  It can trigger an income tax on the portion of the debt that is canceled.

But the strongest reason to approach debt settlement with skepticism is that, without all of the creditors buying in and settling the debt for an amount you can actually pay, you may end up having to file bankruptcy anyway to get a truly fresh start.

For most families in debt, half measures are not enough to right the financial ship.

Image courtesy Cometstarmoon

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