July 21, 2015

The “DO’s” and “DON’T’s” of Debt Settlement

When it comes to debt settlement, there are universal “DO’s” and “DON’Ts” that apply to almost any debt situation. Debt settlement can be a powerful tool for recovering financially if you have the resources to make debt settlement offers. However, if you settle your debts without knowing these few important things, your settlement efforts may create unforeseen problems.


Arguably, the most important “Do” of Debt settlement is to document your settlement agreement. If you pay the creditor a lump sum to settle without documentation, it is possible that the creditors or a collection company could improperly attempt to collect on the rest of the debt in the future. Make sure to fully document the settlement as much as possible through a signed document by the creditor or some form of actual signed release. At a minimum, be sure to have a clear written expression of the settlement agreement. In addition, it is good to write on the bottom of the check and back of the check that the tendered payment is for full settlement and satisfaction of the debt. Such documentation paper trail could protect you in the future if your creditor mistakenly attempts to collect on the same debt in the future.


When settling certain forms of debt, you can be liable for income tax on the forgiven portion of the debt. When counting the total cost of settlement for your debt, it is very important to factor in the possibility that taxes may be owed on the forgiven portion. If you do not factor this in to your settlement plans, your financial situation may become worse: you could acquire large, difficult to settle tax debt that cannot be discharged very easily in bankruptcy.

DO NOT EXHAUST YOUR ASSETS OR 401K’s: Know When It’s Better to File Bankruptcy

A huge “DON’T” when settling your debts is to exhaust all your resources. You do not want to exhaust all your resources and then still have debts that are unsettled. It can be dangerous to deplete large portions of your 401(k) or other savings when you settle your debts. If you cannot settle your debts in entirety with money to spare, it may be advisable to seek out bankruptcy options. If it is impossible to feasibly settle all your debts without depleting your 401(k), bankruptcy could be a much safer option for your financial future.

Seek professional advice

Professional advice of an attorney or other financial professional is usually affordable or free. It is very important to make a sound plan for settling your debts and a local attorney may be able to greatly assist you in the process. A local attorney may charge only $500-$2000 for settling your debts. It may be worth the extra money you pay in order to have less personal work and the peace of mind that your debts are within the hands of a professional. Remember, a local, trustworthy attorney or professional is generally a safer “bet” than a larger company or out-of-state operation.


Remember, debt settlement can be a powerful solution to seemingly impossible situations. Remember that debt settlement is only the best option for certain situations where assets or cash is sufficiently available to make solid settlement offers. It is important to make sure that all options are considered before commencing attempts to settle your debts.

~John F. Bymaster, Indianapolis Bankruptcy Attorney

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