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Weighing Chapter 7 bankruptcy against debt settlement

For those in Tennessee who are burdened with heavy loads of debt, there are several available options to find relief. One involves filing for Chapter 7 bankruptcy, a process that is never one’s first choice. Another option is pursuing debt settlement, which is a path that may seem very appealing to many consumers. It is important to understand the differences between bankruptcy and debt settlement prior to making a choice.

Debt settlement works by negotiating directly with creditors to reduce the total amount owed on a given debt. The consumer agrees to pay the reduced amount, and the creditor agrees to forgive the remainder of the debt. That debt goes away on paper, but there are tax ramifications that are often not considered during the decision-making process.

Forgiven debt is usually reported to the IRS as taxable income. That means that the consumer will have to pay taxes on that amount, just the same as if it were money earned from a job. At the end of the day, the math could work out to show that the debt settlement process did not provide the debt reduction that the consumer had hoped for.

Personal bankruptcy, on the other hand, is a process by which many types of unsecured debt are eliminated through discharge. That means that those obligations will never need to be repaid. The discharged amount does not count as taxable income, leaving the consumer free to pursue credit repair efforts and to begin building an emergency cash reserve. That is the stability that many Tennessee residents seek when filing for Chapter 7 bankruptcy.

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

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