NJ Journal Says Debt Settlement "One Step Above Bankruptcy"

Is debt settlement bad or good? I guess it depends on your perspective. Recently, the NJ Journal ran the first of a two part series on debt settlement and it points out some of the good and bad things about the debt settlement process:

Under a typical debt settlement plan, the debtor agrees to deposit some percent of the total amount owed, usually 12 to 18 percent. This can be done in one lump sum, but is usually made over three monthly installments.

The third party negotiator is targeting to settle your debt at around 35 percent of the total. Note that the installments are made to the third party settler not your credit card companies.

These deposited funds will be available to start the settlement plan once agreed upon, usually over a 36-month period.

Since the card companies have not agreed to anything, at least not yet, the accounts become delinquent. This can trigger late fees, penalties and higher interest rates that are part of the credit card agreement. Also, the credit card company can now sue to collect or garnish wages.

If an agreement is reached, a “settled for less than full amount” will appear on your credit report and will stay on the report for seven years.

So you really are destroying your credit if you have been at least making the minimum payments. Furthermore, debt that is forgiven above $600 may force the debtor to be responsible for state and federal taxes as the creditor must issue a 1099C form, although the IRS does allow for an insolvency exemption.

Is debt settlement just one step above bankruptcy? According to the author, maybe:

Clearly, debt settlement should not be taken lightly as it is close to being just one step above declaring bankruptcy.