For many people in debt, bankruptcy is far and away the most cost-effective form of debt relief. However, for those who have significant non-exempt assets or higher income, bankruptcy may mean that they pay back a lot, if not all, of their debt. For these people, debt settlement may be a more cost effective solution.
Debt settlement means directly negotiating with your creditors outside of bankruptcy to achieve a reduction in the balance you owe your creditors. Most credit card lenders and medical creditors will accept a fraction of the balance owed in full settlement of the debt. Some creditors drive harder bargains than others, but our experience is that a balance reduction of 50% can be achieved across all of your credit card and medical creditors (some may take as little as 10% or 20%).
In order to achieve a reduction in the balance you owe a creditor through debt settlement, several factors generally must exist:
Debt settlement carries with it an inherent risk of being sued. Because settling debts requires you to be in default, there is always a risk that you will be sued while settling your debts. The reason a creditor sues you is so that the creditor can get a judgment, which can be used to put a lien on your home or to garnish your wages or bank account. Generally speaking, you can settle debts even when you are being sued. However, the amount you pay to settle tends to increase after you have been sued. Additionally, you may need to respond to your lawsuit in order to settle it. If you do not respond, the creditor is able to garnish your wages, and settlement becomes difficult if not impossible.
Timing is a key component of debt settlement. On the one hand, you must be far enough into default in order for the creditor to consider taking a fraction of the debt to settle it. And many creditors become willing to accept less in full settlement of a debt as you go farther into default. On the other hand, missing payments to creditors means you are on the road to getting sued. While each creditor and each debt will be different, they tend to follow a similar curve.
It is important to know that debt forgiven through settlement is taxable income. For example, if you pay $4,000 to settle a credit card balance of $10,000, the credit card lender will issue you a 1099 for $6,000 of taxable income. This is a key distinction from bankruptcy, where discharged debt is not taxable. You may be able to avoid the tax on debt forgiven through settlement if you were insolvent (i.e., your debts are worth more than your assets) when you settled the debt.
Wink & Wink can help you settle your debt. Wink & Wink will manage the communications with your creditors so you aren’t inundated with collection calls and so that the message to the creditors is crafted toward getting you the best settlement possible. If you get sued, Wink & Wink can advise you on how to manage the lawsuit for settlement. Additionally, because of our experience in settling debts, Wink & Wink can advise you when a settlement offer is likely to get better and when to accept an offer because it is likely to get worse. Finally, if your situation changes while you are attempting to settle your debts (ex., your income changes), Wink & Wink can help you re-evaluate your debt relief options, including bankruptcy.