Debt Settlement

Some clients are in need of debt relief from unsecured creditors, but are unable or unwilling to file a consumer bankruptcy. This is a common situation with:

  • Business owners who have overextended on credit card bills, but want to attempt keep a business.
  • High income individuals that cannot make minimum payments to the credit cards but could not afford a chapter 13 bankruptcy payment.
  • Individuals that are willing to accept some risk in the resolution of their debts.

Debt settlement take the old adage a bird in the hand is worth two in the bush and brings it to the negotiation. Clients essentially make a decision to stop making payments to their unsecured creditors. When this occurs, often frantic collections activity occurs against the borrower through repeated phone calls from debt collectors, letters of collection, and lawsuits for the debt being filed.

At some point down this road typically between 12–24 months, the accounts can be settled for less than their full value. Here is an example:
Bank of Aloha issues a credit card to Jim and Susie. Due to medical expenses, Jim and Susie are forced to max the card out and have a $20,000.00 balance. They are unable to make minimum payments. They make their last payment in August 2010, when they hire my offices. By July 2012, I am able to negotiate a settlement on the account in full for a one-time $5,000.00 payment.

There are some important things to understand in debt settlement cases.

  • You must have the funds available for disbursement when I receive an acceptable offer. For instance, in the above example, Jim and Susie must have been able to provide a check for $5,000.00.
  • The discount amount will be treated as taxable income. Jim and Susie will receive a 1099 for $15,000 which they will have had not tax withheld.
  • This will result in a significant tax bill that must be thought out and planned for prior to going down the debt settlement road.
  • You can still be sued during this process. If the lender is not willing to provide a settlement offer than you a borrower can either afford or is willing to afford, the lender will often sue the borrower to recover its funds.

Debt settlement can be a powerful option in certain situations. I offer this service when it is right for the client. This is a particularly useful option for clients that currently take losses in their businesses and the 1099 income from the settled debt won’t result in a large tax bill.

If you need help settling your debts rather than bankrupting the debts, call my office to schedule a free consultation to discuss your options.