I have met with several people that have tried debt settlement or are considering debt settlement as an alternative to bankruptcy.  I have also settled credit card debts for clients.  Debt settlement refers to the process of paying substantially less than is owed. For example, a person who owes $30,000 to three different credit cards signs up with a debt settlement company that promises to settle the debt for $10,000.00.  The person agrees and starts paying a monthly amount to the debt settlement company.  Let’s say the payment is $500.00 per month. The first four or so months of payments go to the debt settlement company’s fees. Once they are paid, then they start saving the monthly fees the person pays them, and when they have enough to make an offer to one of the creditors, they do so. The process continues until one of two things happens: either all the debts are settled, or the person can no longer make the payments.

A study by the National Association of Consumer Bankruptcy Attorneys, a group of which I am a member, found that the majority of the time what occurs is that the person can no longer make the payments to the debt settlement company. When that happens, the person is still left with a substantial amount of debt and may have increased their tax debt from debt forgiveness.

Debt settlement may be appropriate for some people. However, one should keep in mind that credit card debt is dischargeable in bankruptcy, and there is no debt forgiveness income.  If you are considering debt settlement, read the NACBA press release and study. Also, talk to a bankruptcy attorney.