Debt Settlement - A Way to Avoid Bankruptcy?

Debt has a way of quickly becoming unmanageable. As bills pile up and people scrape by just to meet minimum payments, sometimes it seems like the only option is to file for bankruptcy. However, this is not an attractive option - not only is bankruptcy considered unethical, bankruptcy laws are changing, making it difficult to declare bankruptcy. In addition, it appears on the person's credit score for up to ten years. In addition, it's a matter or public record.

However, there are options that make avoiding bankruptcy a possibility. One of these options is debt settlement.

What Is Debt Settlement?

Debt settlement is a process that allows people to reduce their outstanding debts by 40-60%. The person who opts for debt settlement hires a settlement company, who in turn negotiates with creditors to come up with an amount to pay that is affordable.

Creditors will normally only take settlements from people who are in line for bankruptcy, as it is a guaranteed way to get their money back when the only other option is bankruptcy, which they will get nothing from. Since creditors often refuse to negotiate with consumers, a debt settlement agency may be your best bet. However, it's important to go with a reputable agency. Check the Better Business Bureau to make sure they are in good standing before deciding to allow them to help you with your debts.

The entire process takes between 4 months to a year for the debt to be settled. While they are generally reserved for credit cards, you can also use debt settlement for some medical bills as well as certain types of loans, but not student or federal loans.

There is some debate as to whether debt settlement adversely affects credit. It is definitely not as bad as bankruptcy, since it is not public record. Some look favorably upon it because it shows you are concerned with paying your bills. However, most professionals will agree that on a scale of 1-10, it puts a person at about a 6, where most people who would go in for a loan would need a 1 or 2 to qualify. So it does affect credit, but not as adversely as bankruptcy.

Before You Settle

If you are considering debt settlement as a way to avoid bankruptcy, there are a few things to keep in mind:
- Timing. The faster you can settle the debt, the better. It is generally recommended you opt for debt settlement when your debts are less than 6 months delinquent.
- Know the Statutes of Limitation. Some debts actually expire (usually after 4-6 years), and there is really no use in paying a past Statue of Limitations debt, which usually results in a charge-off.
- Know your rights. If you know your consumer rights with regards to debt collection and the fair credit reporting act, you eliminate your chances of being harassed by creditors.
- Research the company. There are many disreputable debt settlement companies. Research their standings with the Better Business Bureau and Office of Attorney General in the state you're living in.
- Read before signing. Make sure you know exactly what you're getting into when you sign with a debt settlement agency. This includes any fees, hidden or not.

For some people, debt settlement is a viable and better option than bankruptcy. However, it's important to know everything debt settlement entails before signing on with a debt settlement firm.