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Comparison of debt settlement to bankruptcy

Financial problems could strike almost anyone in Massachusetts after a job loss, death in the family or medical emergency. When debts become impossible to pay, people might turn to debt settlement. Debt settlement generally involves contracting with a company that will attempt to resolve debts with a lump sum payment of less than the total amount that is due.

Although debt settlement might initially attract people who are leery of filing for bankruptcy, the process has drawbacks. Unlike Chapter 7, in which some debts could be discharged in a matter of months, debt settlement negotiations could take years. During that time late fees and interest continue to add to the balances. The debtor also lacks any protection from harassment by creditors during this process, and a creditor could even file a lawsuit.

When debt settlement does occur, the portion forgiven by the creditor in many cases becomes taxable income in the view of the Internal Revenue Service. Taxes and fees paid to the debt settlement company could mean that the process only really erased about 10 percent of the original debt. People might still choose debt settlement because they think that they will lose assets in bankruptcy. However, both federal and state laws provide for many assets to be exempt from liquidation by the trustee.

A person confronted by overwhelming debts could speak with an attorney to learn the possible effects of a bankruptcy on assets and credit rating. An attorney could prepare the paperwork for filing for Chapter 13 bankruptcy and take over all communications with creditors during the process.

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