Before the new Federal Trade Commission laws were changed in October of 2010, the success rates for debt settlement companies were very poor. It is estimated that up to 70% of the debt settlement companies fail in their attempts to settle debts owed by debtors. What happens to the upfront fees paid by the debtor if the debt settlement option fails? The debtor maintains their debts.
Stricter laws have been implemented for debt settlement. For example, under new debt settlement laws, companies cannot receive up-front money and they can only receive up to 15% of the money negotiated as a settlement commission.
Debt settlement may be a good option for some debtors but before using a debt settlement company, you may want to consider:
- When you are in financial trouble, you usually don’t have a lot of cash to service debt. Adding only 15% to any bill can be devastating to some. The average debt settlement is usually up to 50%, and if that is what the debt settlement is, you still are paying up to 85% of your original debt. That means you are still exposed to a debt you might not be able to pay, and in addition, your credit score most likely will suffer for the additional exposure. Unless a negotiator is a lawyer, what incentive does a creditor really have in settling a debt with people who are not on the contract?
- You might have to pay income tax on your forgiven debt. Most creditors who settle a debt for so much on the dollar write the rest of the money not collected off their income tax. They are required by law to report the write-off amount to the Internal Revenue Service (IRS), and the debtor responsible for the write-off is credited with income received. IRS taxes are not exempt in bankruptcy proceedings, and the IRS has almost unlimited power in collections. Do you really think settling for pennies on the dollar is worth an IRS tax debt you cannot pay?
- Debt settlement can take a long time and you are exposing yourself to lawsuits during the negotiation process.
- If a debt settlement company suggests debt consolidation, you are often exchanging an unsecured loan for a secured one.
So, what is the alternative to debt settlement? Increasing your income or improving your money management abilities may help, but filing for bankruptcy protection may be the only other option for many debtors.
Debt settlement can increase your expenses and your tax liabilities. It can also expose you to lawsuits. Filing bankruptcy can provide protection from these risks.
Bankruptcy laws can be complicated and you may need a bankruptcy lawyer to help you understand them. If you need relief from the stress of debt and you live in or around the metropolitan area of Houston, Texas, contact us at www.betterbankruptcy.com .We will help you find a bankruptcy attorney in your area who can answer your bankruptcy questions.
Latest posts by admin (see all)
- Free Information Resources for Filing Bankruptcy - August 15, 2013
- When Creditors Change the Rules in Mid Stream - August 13, 2013
- Understanding the Concept of a Claim in Bankruptcy - August 8, 2013