Frequently Asked Questions
Is debt settlement better than bankruptcy?
For most people with significant unsecured debt, no. Chapter 7 eliminates debt in 3-4 months, costs $1,500-2,500 total, and has no tax consequences. Settlement takes 2-4 years, charges 15-25% in fees, triggers taxes, and only resolves 35-60% of enrolled debts.
Do you have to pay taxes on settled debt?
Yes. Forgiven debt over $600 is reported on IRS Form 1099-C and treated as taxable income. The insolvency exception may apply. Bankruptcy discharge is excluded from taxable income under IRC Section 108. See the 1099-C tax bomb.
How much do settlement companies charge?
15-25% of total enrolled debt. On $50,000, that is $7,500-$12,500 in fees -- separate from the settlement payments and taxes. See settlement fees.
Can creditors sue me during settlement?
Yes. There is no legal protection during settlement. Only bankruptcy provides the automatic stay, which immediately stops all collection.
What if debt settlement does not work?
You can still file bankruptcy. Many people try settlement first, spend 1-3 years and thousands in fees, then file Chapter 7 -- the option that would have solved it in 3-4 months.
Does settlement hurt your credit more than bankruptcy?
Both damage credit, but settlement creates rolling damage over 2-4 years while bankruptcy is a single event. Most Chapter 7 filers recover to 700+ within 2-3 years. See credit impact comparison.