The promises made in the advertisements for debt settlement services can be alluring to people struggling with debt. These services make it seem so easy to negotiate down your debt. They promise to negotiate your debt down by working with your creditors, to get your payments to something that you can manage and reduce the amount that you owe. And they offer to do this all at a reasonable fee that you can afford. That said, debt settlement services are often deceptive.
There is a saying that if something seems too good to be true, it probably is. People who enlist a debt settlement service are often disappointed to realize that these services do not deliver what they promise.
Rather than preserving your credit, they actually make it far worse. In fact, ruining your credit is part of their strategy. The first thing they tell you is to stop paying your creditors and start paying them. The first money you pay goes to their fees, not your creditors. Once your credit has been completely destroyed, they then try to use that as leverage to settle. What frequently happens is that they may settle some of your accounts, but several others refuse to settle and then end up suing you, resulting in your having to file bankruptcy anyway. In the meantime, you’ve wasted thousands of dollars on fees that accomplished absolutely nothing. Keep in mind that unlike bankruptcy, where creditors are bound by federal law, with the debt settlement programs, they have no legal obligation to negotiate.
Another problem with debt settlement companies is that they can cause you huge tax problems. If a creditor voluntarily agrees to take less than the full amount that it is owed, then the creditor may report the amount written off to the IRS, and this “forgiveness of debt” may be considered income that you have to pay taxes on. On the other hand, wiping out or reducing your debt through bankruptcy does not create taxable income. So you will not get a bill from the IRS as a result of filing for bankruptcy.
Debt settlement services have no legal power behind them. They are rarely operated by lawyers with an understanding of creditor and debtor law and more often are simply untrained customer service personnel calling creditors. On the other hand, bankruptcy is a tried and true debt relief option that has the power of federal law standing behind it. While alternatives to bankruptcy may look good on the surface, in the end, there is a legal remedy available.
Whether you have considered working with a debt settlement service or you already have and found your situation worsened, we welcome you to contact us for a risk-free discussion of your options. At Schwartz Bankruptcy Law Center, we are committed to overcoming debt. Contact us today.