Debt Settlement & Alternatives To Bankruptcy


You have options in dealing with your debt, but be aware: There are no magic solutions. Whether you file bankruptcy or not, we always strive to make sure you understand your options and the costs and benefits of each of them. We will always do our best to give you straight answers.  

It is hard to believe, but not everyone who proclaims to offer a “solution” to your debt has your best interest at heart. If they can’t clearly explain how their remedy works, and more importantly how, how much, and when they get paid, they aren’t looking out for your best interest. We have recommended a number of alternatives to potential clients over the years, and below is our take on some of the most common options:


Our office has helped many clients deal with their debt by negotiating a settlement with their creditors. While most of our clients want to pay their creditors, the reality is that only some can really afford to do that. In some cases, settlement is the best option.  

The goal of a debt settlement is to arrive at a written agreement in which our client agrees to pay a fixed amount of money through either a lump-sum payment or a series of monthly payments to the creditor. In exchange, the creditor discounts the debt and agrees to forego all of its collection remedies so long as the payments are made on time. Upon final payment of the settlement amount, the remaining debt is forgiven and any judgment or lawsuit is satisfied or dismissed. Our leverage with the creditor is that bankruptcy is always an option if we cannot arrive at a reasonable settlement of the debt. The creditor will often want a financial statement to verify your situation and determine if other assets of value are available that you could liquidate to pay them, or they could liquidate if they received a judgment. 

Debt settlements can be concluded in a matter of weeks but sometimes it can take months or even a year or more to reach a settlement agreement. The timing often depends on how much authority the parties you are dealing with have to negotiate the settlement. With older debts that have gone through many collection cycles and attorneys, it can be difficult to even find the parties needed to negotiate with.

Not all debts can be successfully settled.  If the creditor is unreasonable in its demands or the attorney representing the creditor is unreasonable or difficult to deal with, it may not be possible to reach a settlement.

Debt forgiven in a settlement is taxable income, and a creditor who forgives debt as a result of a settlement agreement is required to issue a 1099 to you after the settlement is satisfied. However, debt discharged in a bankruptcy is NOT taxable as income. This can be an important consideration in assessing whether settlement is an option for you.  

As for our fees, we typically charge a fee up front, which we hold in our Trust account to pay for our time we spend in negotiating the settlement. The fees for settlement are typically less than what you would pay in a bankruptcy, but multiple settlements can increase the cost.


Sadly, we get calls and emails from clients of online “debt relief” schemes every single week. Most of these calls and emails turn into bankruptcy clients. The online debt relief companies promise hope, and a way out of debt. Here’s how they work: You make a steep monthly payment to this company, which puts it into your “client account” where this money is supposed to build up to a big amount that it will then use to negotiate settlements with your creditors. If it all works out, you can save money by only paying a part of your debts through the settlement (but watch out for the 1099s at the end). 

What they don’t tell you is that they charge massive fees, usually taken out first from the settlement funds in your “client account,” and that many creditors will not idly wait for the debt relief company to try to negotiate a settlement. Rather than wait for a settlement offer at some indeterminate point in the future when your “client account” has enough money in it, the creditor will sue you. If the creditor sues you, gets a judgment, and tries to garnish your wages, then the debt relief scheme falls apart quickly – except that the debt relief company keeps the fees that it has taken.  

Our clients have not had good experiences from these online “debt relief” companies, and are often left poorer as a result.


There are a couple nonprofit organizations in Minnesota that DO offer legitimate debt relief. Lutheran Social Services and Family Means are two local nonprofit organizations that offer what is called a “debt management plan.” A debt management plan is a repayment plan, typically lasting between 3 and 5 years, in which you make a payment each month to repay your debt. Lutheran Social Services and Family Means negotiate substantial decreases (sometimes even to 0%) in the interest rates on credit card and other unsecured debt, and you make a single monthly payment to the debt management plan, which then splits your payment to each creditor. At the end of the plan, you’ll have paid off all your debt in full.  

The fees that are charged by Lutheran Social Services and Family Means are very low, and offer a great way to repay one’s debt without having to pay onerous interest rates.  

The biggest downside to debt management plans is that you must repay the debt in full in 5 years or less, which may require more money that you can afford.  A debt management plan is also voluntary for creditors, and certain credit card companies and other lenders refuse to participate (not so with bankruptcy).  

Be aware of alternatives to bankruptcy – no one we meet truly wants to file bankruptcy. However, it is important to keep your eyes wide open, understand what each alternative really offers, and be honest with yourself about whether an alternative to bankruptcy is truly realistic and feasible.

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