Many more people are becoming interested in debt settlement as an alternative to bankruptcy. That’s because a new bankruptcy law was enacted on October 17, 2005, and it’s a rude awakening for many consumers seeking a fresh start in bankruptcy court.

Previously, 7 out of 10 people who filed for personal bankruptcy were granted Chapter 7 status, where unsecured debts are eliminated entirely. That has changed under the new rules. If your income is above the median for your state, or if you can pay at least $100 per month of your debts, then you will be denied Chapter 7. Instead, you will be switched to Chapter 13, where you pay to repay a portion of debt for 3-5 years.

It gets worse. When the court calculates your allowable living expenses, it will use IRS-approved schedules, not your actual documented expenses. So even if you don’t think you can afford $100 a month or more, the judge probably won’t agree. Instead of a fresh start, many people will be faced with the grim reality of a harsh 5-year plan, with a court-ordered budget that forces them to adopt a much lower standard of living. That’s where debt settlement starts to look quite attractive.

Yes, I know debt settlement has its critics. I myself have criticized aspects of the industry. But what the critics don’t seem to understand is that this approach is for people who would otherwise go bankrupt! Let’s examine the top three complaints against debt settlement and see where the critics go wrong.

“Debt settlement has a negative impact on your credit score.”

wow. What a thing! She states that it is within two years. Would you rather have an A+ credit rating or be totally debt free? Pick one please, because you can’t have both. All debt reduction programs have a negative impact on credit scores. That’s why only people who really can’t keep up with their bills should participate in one of these programs. But there’s no point in worrying about your credit while you’re overwhelmed by debt. That’s like worrying about what the yard looks like after your house has burned down.

“You may have to pay taxes on the canceled portion of the debt.”

It has always amazed me how often this lame criticism is repeated in article after article. Yes, you may have to pay taxes on forgiven debt balances, but the odds are against it. That’s because the IRS allows insolvent taxpayers to exclude canceled debts. So unless you have a positive net worth, you probably won’t have to pay taxes on your deals. And even if you did, so what? You would be paying taxes because you saved a lot of money from your debts! And this is a problem?

“Collection activity will continue and you may be sued.”

Yes, if you fall behind on your bills, your creditors will likely continue to try to collect what is owed, and one or more of those creditors could sue you in civil court. But again, this criticism misses the mark. Collection activity is already a function of being in debt trouble. At least debt settlement allows the consumer to use the collection process to eliminate debt through negotiated compromises. Even lawsuits need not be a cause for panic as they can often be settled out of court. The only reason to allow legal action to proceed to the point of wage garnishment, property lien, or bank garnishment is a lack of financial resources with which to settle. And if that’s the case, the debtor should talk to a bankruptcy attorney anyway.

Instead, let’s take a look at some of the positive aspects of debt settlement.

1. You can save $1,000 compared to any other method of debt elimination (except Chapter 7 bankruptcy, which is much harder to achieve now that the new law is in place).

2. You can get out of debt in 2-3 years, and much faster if there is some equity in the home to work with. This is much better than 5 years in Chapter 13 bankruptcy financial boot camp, or 5-9 years in a credit counseling program.

3. You maintain control over the process more than any other approach.

4. You maintain personal privacy. With bankruptcy, your case file becomes a matter of public record, easily located by future employers, landlords, or creditors through an Internet search.

5. You maintain your dignity while you solve your financial problems. Bankruptcy still feels like failure to a lot of people. Debt settlement represents an honest and ethical alternative to that extreme solution.

6. You can adjust your monthly financing in the settlement schedule up or down depending on real-world conditions in your financial life. If your income fluctuates from month to month, or you’re faced with an unexpected expense, you won’t screw up the entire program. The built-in flexibility of debt settlement gives it a huge advantage over other options, all of which require a fixed monthly payment.

Once you’ve made the determination that debt settlement makes sense for your situation, you’ll need to decide whether to go it alone or seek professional help. For people who are not easily intimidated, there is no doubt that the DIY approach is the way to go. For others who can’t handle the slightest bit of pressure or simply want to focus their time and energy elsewhere, hiring a professional settlement company may be the right choice.

If you decide to take the DIY approach, follow these tips:

* Use a privacy manager on your phone service to filter calls from creditors so you only talk to creditors when you’re ready.

* Make sure you have a solid game plan to accumulate money to pay off, and reserve the funds in a separate bank account.

* Do not send settlement funds until you have the deal in writing. Without exceptions!

* After paying the settlement, follow up to get a zero balance letter from the creditor, so you don’t have bogus collection problems later.

* Learn your rights as a consumer by reading the free debt, credit, and collections resource articles on the Federal Trade Commission website: http://www.ftc.gov

* Don’t be intimidated or pressured into agreeing to a settlement you can’t handle.

Remember, thousands of people settle their own debts each year without the need for lawyers or bankruptcy. You can, too, if you’re disciplined, determined, and prepared to ignore some of the crazy stuff collectors say. When you’re finally debt free, you’ll feel so much better about working it out on your own.