Debt settlement can seem like a better option than bankruptcy, especially now that increased regulation and enforcement have forced settlement companies to do what they promise and persuade at least some of a borrower’s creditors to forgive a portion of the debt owed.
But in many ways, bankruptcy is a better option than debt settlement.
Freedom Financial Network, which is the largest debt settlement company, states that half of its customers eventually settle at least three-quarters of their debt, but the process can take three to four years.
Similarly, the amount of forgiven debt is usually reported to the IRS and is taxable as income.
With a Chapter 7 bankruptcy filing, however, debts are erased in three to six months, and state laws protect most if not all of what filers own. Also, credit scores begin to recover immediately after the process is complete. And bankruptcy halts collections, including lawsuits, and can end wage garnishments.