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Debt settlement may act as alternative to bankruptcy, although other options also exist
By Peggy Stillwell on Jul 26th, 2010
One reason why debt settlement may be an attractive option is that it could help consumers avoid having to declare bankruptcy.
While debt settlement does affect a credit score negatively, it does so in a lesser way than bankruptcy while allowing people a way to pay off some of what they owe. However, in a recent report for Bankrate.com, Steve Bucci noted that consumers should be aware that settled debt may be considered as income.
"You may also have tax consequences for any debt reduction that exceeds $600," Bucci wrote. "The amount exceeding $600 is reported to the [Internal Revenue Service] as income on Form 1099."
Before approaching the option of debt settlement, Bucci said people may consider a debt management plan from a consumer credit counseling agency. Depending on the credit bureau, such a plan might not have an effect on a credit score.
That may be especially important, as some lenders are paying even closer attention to a person's credit score before granting a loan. This is because these institutions are trying to avoid any unnecessary risks.
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