I am a financial advisor who trys to help people get out of debt while building up some savings at the same time.
I wanted to know what your thoughts are on do it yourself debt settlement as an alternative to bankruptcy.
I would not use or recomend a debt settlement company as most of these seem to be scams, and when it comes to bankruptcy most people I see go through it do a chapter 13 and end up worse off.
So from my research to date it looks like settling your debts yourself would be my second choice if you can not afford to do a snowball type debt pay off plan.
What are your thoughts on this?
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Thank you so much for asking me your question.
For the right person in the right situation debt settlement is a viable option. But the target characteristics are someone who has cash on hand to settle and would otherwise have to have filed a chapter 13 bankruptcy. In those cases attempting to negotiate a suitable mutually agreeable settlement with the creditor may be possible.
But rather than become a tough exercise, people will be surprised to find proactive settlement offers sent to them by their creditors when they fall 90 to 180 days behind. I'm even seeing more settlement offers being sent by private student loan creditors. Just yesterday a reader told me they received an offer from their private student loan lender for 20% of the balance.
But settling debts is not a magic wand. There are risks and consequences. I would suggested you read my guide on the pros and cons of debt settlement before anyone you know launches into trying to settle their debts.
The two biggest risks of settling debt are the potential tax bill that may be due from the forgiven debt and the potential to be sued by the creditor if no mutually agreeable settlement offer can be reached. Once someone defaults on their debt the creditor may take advantage of all of the steps they laid out in the account terms and conditions, including avail themselves to take legal action.
The problem with the way debt settlement was sold over the past five years was the salespeople sold it to anyone with a pulse rather than properly qualifying the right people for the approach.
I've seen all sorts of horrid examples of people who were sold into debt settlement programs. The wrong person would be someone that could file a chapter 7 bankruptcy instead or who did not have the cash on hand to settle now. By putting these people into a debt settlement program it set them up to really be sued and it robbed them of the ability to save as much as possible for retirement.
There are some very good coaches out there who are very affordable and inexpensive and can guide someone through the DIY debt settlement process. People like those here, here, and here.
But before anyone makes any decision about what approach is best for them to use to get out of debt I would suggest they review their options using the How to Get Out of Debt Calculator.
I really like your approach of helping people to get out of debt and save at the same time. It's such a critical thing to do and something that most people overlook.
But my overwhelming concern here are those people who jump to other solutions because they want to avoid bankruptcy because of assumptions or fears of bankruptcy. Bankruptcy is actually the most logical and mathematically sound way to deal with problem debt. And when you understand the facts about bankruptcy it's hard to say it's not the preferred way to deal with bad debt.
About 70% of people who file bankruptcy discharge their debts in about 90 days and can get back to building a safer financial future as quickly as possible. It's easy to rebuild credit and people are surprised how quickly they will be able to get credit again.
If someone wants to honor promises to repay debt, there is nothing that prevents anyone from getting the legal protections and fresh start bankruptcy affords them and repay their creditors as they can, if that is what they want to do.
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