Why Should I File for Bankruptcy if I Can Just Settle My Debts through a Debt Negotiator?

There are many commercials on TV today paid for by debt settlement companies offering to settle all of your debts and keep you out of bankruptcy.  These commercials sound too good to be true and often times they are.  They are promising to settle or consolidate all your debts for you, and only require you to make one easy payment a month.  Here is what these companies are not telling you:

  1. The fees they charge you are steep.  Debt settlement companies usually have you provide them a monthly fee to “work on your file” and a portion of that monthly fee will put into an escrow account to use to negotiate with your creditors.  A recent client of mine was paying $700 a month to a debt settlement company and only $350 was put into his escrow account the rest was the debt settlement companies monthly fee.
  2. Not all of your creditors will settle with the debt settlement companies.  The debt settlement company can’t force any creditor to take their offer (especially when they are offering pennies on the dollar).
  3. Debt settlement companies ask you to STOP paying all of your debts, and by doing so the chance of you being sued will be more likely.  Once you are sued and a judgment is obtained against you the creditor can freeze your bank account, wage garnish you, or even take and sell some of your assets.  However if you file for bankruptcy you will be able to eliminate your debts as well as prevent any type of lawsuits to be filed against you.
  4. There will be tax implications!!!  Debt settlement companies tend to forget to tell you that any amount that the creditor chooses to forgive in the settlement will be taxed as ordinary income by the IRS.   Here is an example, say you owed $25,000 on a visa card and your debt settlement company negotiates a settlement for $10,000.  At the end of the year the credit card company will send you a 1099 form for the amount of $15,000 and you will be responsible for paying the taxes of the $15,000 at the end of the year.  However if you filed for bankruptcy, any debt that gets discharged will not be subject to taxation.
  5. You will need to have money to use a debt settlement company.  The commercials tell you these debt settlement companies can settle your debt for pennies on the dollar, but what they don’t tell you is that you need to have the money ready to go and make one lump payment.

Bankruptcy can usually offer better results and provide an economically better solution than a debt settlement company.  If you would like to find out more about bankruptcy and would like to schedule an appointment with Shmucher Law, PL at one of our five office locations (Boca Raton, Fort Lauderdale, Miami, Plantation or Sunrise) then give us at call at 954.309.5559.

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