Dear Liz: My wife and I have never recovered completely from my being laid off a couple of years ago and then taking a job at a much lower salary. Because of late charges, over-limit fees and higher interest rates, we never seem to make any progress in getting out of old debt. We have just been offered a settlement amount by one creditor on a debt for some windows. It will reduce what we owe from about $7,500 to about $1,900. With a 30% interest rate and over-limit fees each month, we were getting nowhere in paying this off. Should we accept this offer? Our credit scores are already shot.

Answer: If you can’t pay off the debt and your scores are already in the tank, a settlement can seem tempting. But there are some things you should know.

Your scores probably will suffer further damage, because a settlement is considered a major black mark on your credit.

Also, the forgiven debt may be reported to the Internal Revenue Service as taxable income to you, which would increase your tax bill. Some creditors have been known to sell the unpaid debt to collectors, so you would want to be sure to get the creditor’s promise in writing that the debt won’t be resold.

If this settlement will help you pay down your other debt, it might be worth doing. If, on the other hand, you’ll still be overwhelmed, you might be better off filing for bankruptcy instead. Bankruptcy could wipe out your consumer debts, such as credit cards, personal loans and medical bills, allowing you to get a fresh start.

Before you accept this settlement, consider talking to an experienced bankruptcy attorney about your options.

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