Debt settlement requires that you negotiate with creditors to settle debts for less than what you owe. Once an agreement is reached, you pay the agreed amount and your liability for that debt goes away. What these debt settlement companies don’t tell you is that you will also receive a 1099 tax form they filed with the IRS. Now that the debt is gone, you’ve got a tax bill for that settled debt. So, not only have you paid to get rid of the debt, you owe income taxes too.
Too often, hiring a debt settlement company to help you negotiate with creditors can cost in the thousands of dollars. What happens is that they set you up on their payment plan and then the debt settlement company begins taking your money first for their fees and never paying a dime to your creditors until their fees have been paid in full. Many consumers end up in litigation with their creditors and these companies do nothing to assist consumers until they’ve been fully paid.
Here’s an example: Say you owe $5000.00 to credit card and you’ve done well and negotiated this debt down to $500.00. You must pay $500.00 to get rid of the debt. At year’s end you will receive a tax bill for $4500.00 and you must pay income tax on that amount; perhaps another 15% depending upon your tax bracket. You’ve paid a total of $1175.00 to settle that account. Simply follow this plan until each credit account has been eliminated and you get the picture. Add to that cost, the fees for hiring a debt settlement company and you have nothing left.
Bankruptcy, on the other hand, effectively eliminates all debts, without any income tax liability. Usually, you are charged a flat fee for services. Once you’ve received your discharge, your debts are gone forever. Isn’t that your goal? So, you pay nothing to your creditors, have no income tax liability and pay one flat fee to file your bankruptcy case and your debts are permanently eliminated. There’s no sense in foregoing a free consultation with a bankruptcy lawyer because you can generally keep your cash and belongings and still eliminate your debts.
Your credit score is the last thing you should be thinking about during any financial crisis. Besides your credit score only measures how well you manage DEBT and isn’t that what you’re working so hard to get out of? We have generally found that most people who file for bankruptcy have their credit score actually increase because the debts are gone. Soon after, you’ll receive offers for credit because the creditors know that you cannot file bankruptcy for another 8 years, making you a prime candidate for high interest credit cards. But why would you want to create debt ever again?