JC Law Group PC assists clients in settlement negotiations with creditors. Debt settlement is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. In general, debt settlement is a viable solution only if you have lump sum cash to be able to settle.We believe debt settlement should be approached with caution because unlike bankruptcy, there is no guarantee that we will be able to settle your debt. In fact, no one can guarantee a settlement with a credit card company, collection agency or with a plaintiff’s firm representing a creditor. The only sure method of getting out of credit card debt is repaying the debt in full, the debt is so old that the statute of limitations prevents a lawsuit, or bankruptcy.

For the debtor, however, debt settlement can sometimes make sense where the debtor does not qualify for a Chapter 7 bankruptcy, and under Chapter 13 bankruptcy, the debtor would be required to pay back most of the unsecured debts anyway. You should consult with a San Francisco debt settlement lawyer to discuss these options.

For example, let’s assume Client A has three credit cards with the following balances. Card 1: $20,000, Card 2: $15,000, and Card 3: $5,000 for a total of $40,000. Assume Client A elects for debt settlement. Suppose Cards 2 and 3 agree to settle for 50%, hence reducing the combined debt on those two cards to $10,000. Client A settles with Cards 2 and 3, and pays the $10,000 plus either attorneys’ fees or debt settlement company fees. But what if Card 1 refuses to negotiate and sues Client A instead? Client A already paid the $10,000 plus settlement fees, and is now facing a law suit. Client A now has to come up with the $20,000 to pay off Card 1, hope to settle, or file for bankruptcy.

Assuming Client A qualified for Chapter 7 bankruptcy, he could have gotten rid of all of his credit card debts for $306 in court filing fees plus attorneys’ fees, and prevented the lawsuit.

Clients and prospective clients have also shared with us the fees charged by debt settlement companies. Often times the fees alone are exorbitant and exceeds 25% of the total debt. If you quality for Chapter 7 bankruptcy, this option should be explored before committing yourself down the path of debt settlement. If you quality for a Chapter 13 bankruptcy, this option should also be explored because the amount that the credit cards and other unsecured creditors will be paid is predetermined by the court. If you wish to explore this option, consult your San Francisco debt settlement attorneys.

Moreover, the debtor cannot be sued by the creditor when under the protection of a Chapter 13 bankruptcy, and the debtor makes the payments required under the Chapter 13 plan; the creditors are forced to accept a certain amount, and sometimes that amount is zero. The degree of predictability and protection afforded to the debtor in bankruptcy is far greater than in debt settlement. It is rare for a debtor to pay more in a Chapter 13 plan than in debt settlement, especially if a creditor sues you. Furthermore, debt written off in debt settlement is taxed as income to you, whereas debt in a Chapter 7 bankruptcy and Chapter 13 bankruptcy is simply discharged (forgiven).

In debt settlement, the creditors have no obligation to negotiate the debt. It generally requires missing months of payments in order for the creditors to negotiate the debt, which will negatively impact your credit score. Additionally, the balance of the debt continues to grow with the compounding interest (usually at the “default rate” which in many cases is at 25% APR or more) and the you may end up getting sued.

Before you sign up with a debt settlement company, please check the following resources.

Federal Trade Commission

California Attorney General’s Office

Better Business Bureau

JC Law Group PC, is a San Francisco debt settlement law firm that believe each client’s situation needs to be carefully considered and all options presented and explained so that the client has the information and knowledge to make the best decision. Please call us for a consultation to go over your individual situation and we will advise you of the options available to you including bankruptcy and debt negotiation. Please call us (415) 963-4004.

[Click here for Debt Settlement vs. Bankruptcy FAQ]