by Lorna

I want to use part of my income tax return to settle some collection accounts. Is this a good idea?

Then I was planning to borrow from my 401k and settle the rest. I could be debt free in about 2 & 1/2 years.

All my accounts are in collection, some with lawyers and some with the credit card companies.

Thank you

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Apr 13, 2010
settling collection accounts
by: Gerri

Thanks for submitting your debt collection question on our Q&A page.

Settling collection accounts can be a viable strategy for getting out of debt. however, I would strongly encourage you to first get a a free consultation with a bankruptcy attorney before you do anything else.

There are three reasons that I am recommending this. First, even though you intend to settle, that doesn't mean the collectors will accept your settlement offers. You still could be sued ( four debts you haven't been sued for already), and you need to know what your options will be if that happens.

In addition, it sounds like you already have been sued and have judgments against you. I want you to check with the attorney to make sure that your strategy will work, and that your judgment creditors don't have first dibs on your money.

The third reason I when she to meet with a bankruptcy attorney is debt your retirement funds are protected from creditors. Using that money to pay off your debts may or may not be the best strategy, but you need someone who can help you figure out what your options are.

Before you start settling, I would also encourage you to listen to this debt settlement podcast. In particular, one should keep in mind that you could owe taxes on your settle debt. (That's not the case with debts discharged in bankruptcy.)

It it may sound like I'm against debt settlement, but I am not. It can be a viable strategy, however it's not without some pitfalls. So if you're going to go this route, I want to make sure you are fully aware of both the pros and cons.

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