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Deciding between debt settlement and Chapter 7 bankruptcy

When searching for debt relief options, many Washington residents consider debt settlement. The process of debt settlement involves negotiating directly with creditors to reduce the total amount of an outstanding debt. While debt settlement can result in the forgiveness of a large portion of consumer debt, there are many cases where Chapter 7 bankruptcy offers a better path out of financial turmoil.

By the time most consumers are in need of debt settlement or relief, their balances on credit cards and other outstanding obligations are usually bloated by interest, fines and fees. The original balance owed may represent a small portion of the bottom line. Debt settlement negotiations may reduce the total amount that is owed, but there will be a cost for that service.

In most cases, debt that is forgiven as part of debt settlement negotiations is reported to the IRS as taxable income. That means that the consumer will be expected to pay taxes on the amount of debt that was forgiven. Going over the math, it is often revealed that the final cost of debt settlement is not significantly lower than what was owed before the process began.

Chapter 7 bankruptcy, on the other hand, leads to the elimination or discharge of many types of consumer debt. That means that those obligations will never need to be repaid and are not reported to the IRS as taxable income. Chapter 7 bankruptcy offers the chance for a clean financial slate, which is the outcome that many Washington residents seek when they consider debt settlement among other options.

Source:, "Why debt settlement is still a bad alternative to bankruptcy", Liz Weston, Sept. 3, 2017

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