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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Bankruptcy Avoidance: Credit Card Debt Negotiation

    Bankruptcy Avoidance: Credit Card Debt Negotiation

    Debt Negotiation – Credit Card, Medical Bills, Business Debt

    Consumer debt like credit cards and medical bills can be “negotiated” or settled for less than what is owed. There isn’t a law though, that forces a non tax related creditor to settle for less outside of the bankruptcy court. It is truly a negotiation based on the needs, strengths and weaknesses of the parties to the debt, you and the creditor.

    In order to understand the process of debt negotiation it is sometimes easiest to begin with the pros and the cons. This list of pros and cons is being provided for those with serious credit card debt, medical bill debt, or even business related debt, and who may be trying to avoid bankruptcy or just don’t qualify for bankruptcy.


    Debt is Reduced

    If successful, the amount you will pay toward the debt will be less than what you originally owed. Most creditors will consider accepting a smaller amount that what they are owed. In this day and age, they are afraid that you may just file for bankruptcy and leave them little to nothing. I have seen settlements of credit card accounts, second mortgage accounts and medical bill accounts for as little as 5 cents on the dollar. Most creditors settle for 25 to 50 cents on the dollar in the end.

    Forced Budget

    In order to gather the necessary funds to make reasonable settlement offers, you may be required to live on a stricter budget than you are currently using. This may help adjust habits and be beneficial in the future. Many people try to negotiate debt because they have an asset that isn’t going to be exempt in a bankruptcy case. They prefer to use the funds to deal with creditors directly instead of having a bankruptcy on their credit report. For those, the forced budget issue may not apply.

    Less Complex

    The process and the legal issues involved in settling debt can be simpler than filing for bankruptcy.


    Many people don’t like to file bankruptcy based on their own moral compass. They see debt negotiation as way to maintain their conscience and to pay at least some amount toward the debt in order to avoid bankruptcy.


    There are a few more cons than there are pros. I am providing the common list here in an effort to fully disclose to you what you need to be aware of.

    Creditor CallsMany debt negotiation companies set up a monthly payment plan for you. You send them money; they deposit a large portion toward their fee and the rest sits until enough is saved to settle a debt. The process continues in that manner in theory until all the debt is reduced.

    During this process the original creditor is able to continue contact with you because there is no law that prevents it from doing so outside of the automatic stay in bankruptcy. If the debt negotiation company claims that they can stop phone calls, don’t believe them. The creditor may agree to but doesn’t have to.

    Third party debt collectors however are governed by the Fair Debt Collection Practices Act and the calls from them can be stopped simply by sending a short letter by certified mail asking them to stop. You don’t need help to send this letter. If the collector continues to call after receipt of the letter, they can be sued.

    Credit Report

    Most people just don’t have the funds handy to settle the accounts. They must save the money up. That usually means stopping the payment of creditors in order to get there. While the money is being saved and the late pays are piling up each month, the credit score is sliding down the Credit Score “hill”.

    Forgiven Debt and Taxation

    The general rule: forgiven debt is taxable. The creditor will issue a 1099 form to the IRS and tell it the amount they agreed to give up in exchange for your payment. The law treats this 1099 amount as taxable unless you meet the definition for “insolvency”. Many do. (Bankruptcy avoids this whole issue)

    Nothing is Really Guaranteed in Life or During Debt Negotiation

    Some creditors just won’t settle. Some won’t budge off of a certain number. Some won’t talk to your representative. Sometimes you may settle a portion of your debts and because you are unable to settle the remainder you end up in bankruptcy anyway.


    I have reviewed a number of contracts used by debt negotiation “professionals”. They typically require a set up fee, a monthly fee and a percentage of either the total debt or the amount saved.

    For a debtor with $50,000.00 in credit card debt who settles the debt for 50%, or $25,000.00 the overall fee is usually $6000.00 to $12,000.00.

    Payment is being made to set up an accounting system to collect and track your money. When the estimated amount for the fee and the estimated amount that is needed to settle the account are paid, phone calls are made.


    Monthly payments to the debt negotiation professional, doesn’t stop the lawsuit timeline. The lawsuit can’t be stopped short of a bankruptcy filing. Many of those trying to settle debts learn this the hard way. They struggle to make payments and all the while other creditors are getting ready to sue. The suit is filed, you lose and garnishment of wages begins. Now you are out of money and bankruptcy starts to look better.

    You May be Able to Negotiate the Debt Yourself

    You may be able to do on your own what the debt negotiation “pros” profess to able to do for you. Most creditors, especially consumer creditors have a pre-arranged number they are willing to settle for at any given time. That number doesn’t change easily. The real threat of bankruptcy or litigation related to a consumer law violation mentioned to the creditor by a real attorney may do the trick, but short of that…it is really a crapshoot.


    My suggestion for those with serious consumer debt…Contact a local, experienced Arizona bankruptcy attorney. Ask him or her to look at the accounts you are having problems with, your finances and other issues and to compare debt negotiation to bankruptcy based on your individual facts.

    If it is determined that a debt negotiation attempt should be made ie it makes more sense to negotiate than to file for bankruptcy, try to avoid paying the professional on the basis of a percentage of savings or debt total. The hourly rate or flat fee is usually the best way to go in these cases.

    I help clients who don’t qualify or who don’t want to use bankruptcy deal with creditors outside of bankruptcy as well and have done so many times with some great success. You can call and discuss your situation with me for free by phone.