Yes, under the right circumstances settlement of debt can be a good alternative to filing bankruptcy.

A decision regarding options to manage and gain relief from debt, including potentialbankruptcy, is never easy.  After all, no one wants to file bankruptcy if they can avoid doing so.    At Kinkade & Associates we are frequently asked by clients if there are any alternatives to filing bankruptcy.  Under the right circumstances settling debt may be one option.  Debt Settlement is fairly simple.  Your creditors would like for you to pay your debts in full.  However, if you can’t pay your debts in full your creditors would generally prefer to have some money rather than nothing.  When possible, we talk with your creditors on your behalf attempt to negotiate settlement with them.  Since we are bankruptcy attorneys, creditors recognize that the vast majority of the people we represent do in fact file bankruptcy.  This generally causes creditors to ask us if our clients are interested in settling their debt.  If the negotiation is successful your creditor will agree to accept the negotiated lump-sum, a sum that is less than the full amount of the debt you owe. Generally, our average settlement is between 45 – 60% of the debt owed. However, please keep in mind however that this is only an average and actual results vary from person to person and creditors depending on the circumstances.  At times a higher percentage is required, especially if a law suit has been filed.  One of the points of the negotiation is typically to get the creditor to agree that they will not report the debt to the credit bureau as anything other than “settled for less than full amount owed”  There are a number of potential advantages to debt settlement:

1. Debt settlement is much more private than a bankruptcy, which is filed in Federal Court and a matter of public record;
2. Debt settlement may be more beneficial for your credit than a bankruptcy, which typically remains on your credit report for 7 to 10 years;
3. If you have a lot of unencumbered property (property with no liens against that property), debt settlement may actually be less expensive in terms of debt repayment than a Chapter 13 bankruptcy; and
4. Debt settlement can be MUCH less expensive than trying to pay off your debts on your own.

The key to debt settlement, and indeed the difference between being able to realistically consider debt settlement as an option and a potential alternative to bankruptcy, is being able to fund settlement of your debt after negotiation with creditors.  
There are three common ways of paying for debt settlement:

 1. Using an existing liquid asset
2. Borrowing the money
3. Making monthly payments

Using an existing liquid asset to finance debt settlement can work very well.  Using a large tax return, cashing in stocks or mutual funds, or simply using existing cash reserves are all excellent ways of financing settlement.  Borrowing against retirement accounts may be an option.  While cashing in IRA or 401k accounts may also be an option, there can be penalties and tax consequences for taking these funds out prematurely.  In addition, you should also keep in mind that IRA and 401k funds are almost always protected from liquidation in bankruptcy.  Whether or not to borrow against or drawing out IRA or 401k funds is a very important decision that you must discuss at length with a tax advisor as well as one of our attorneys.  DO NOT CONSIDER WITHDRAWING MONEY FROM AN IRA OR 401K WITHOUT DISCUSSING THIS WITH YOUR TAX ADVISOR AND ONE OF OUR ATTORNEYS IN LIGHT OF YOUR ENTIRE SITUATION AS WELL AS CONSIDERATION OF BANKRUPTCY AS ONE OF YOUR OPTIONS.

Borrowing money from family members or obtaining a loan from a financial institution may provide a source of funding to settle your debt.  If you decide to obtain a loan from a financial institution, you might want to do so before you stop paying your creditors as your credit score will drop and it may be more difficult to obtain a loan once this occurs.

Please remember we cannot possibly assist you in settling your debts without your providing to us the money to do so.  Through the process we will obtain for you opportunities to settle the debt you place with us.  The decision regarding whether or not to settle any particular debt is yours.  We may make a recommendation to you based upon our experience regarding a particular creditor but you will make the final decision.   If you reject a settlement we recommend, please keep in mind that you may only thereafter be able to settle that account at a significantly higher percentage, and perhaps only after you have been sued.  Please remember that we cannot and do not guarantee that you will not be sued.  In fact, you may be sued.  If you are sued, we do not represent you in that court case and will not make any appearance for you in that case although we will work very hard to negotiate and settle that debt.  In addition, there may be tax consequences for if you settle debt.  You should consult your tax advisor to learn about the potential impact debt settlement may have on your particular tax situation.

To sum up this article, for some individuals or family’s debt settlement can be a viable alternative to bankruptcy.  We are always pleased to discuss this option with potential clients during a free initial strategy session.  During your free initial strategy session an experienced, knowledgeable and compassionate Kinkade & Associates attorney we will discuss with you whether or not debt settlement may offer you relief from your debt.  Please do not hesitate to contact us for a free initial in-person strategy session if you have any questions about whether or not we can assist you.