Debt Settlement Pitfalls

Debt Settlement Can Leave You Unsettled

Often, when you owe money, you’ll be called by a number of companies offering to help you, at various costs, to negotiate and settle your debt for pennies on the dollar. While this is a tempting offer, it is not without its downsides.

Bankruptcy, for all of the negative press it gets, may end up being a far better solution in the long run.

Let’s look at the implications of settling your debt. I encourage you to explore all options, and am happy to give you a free, unbiased, consultation on how to proceed.

Credit Issues

Almost all debt settlement companies will tell you to stockpile cash in an account, until the balance of the account is high enough to negotiate with creditors.

While this may seem like common sense, the reality is that most people in serious debt can’t afford to pay their creditors, afford their monthly expenses, and have cash left over at the end of the month to save for this process. So, what is often suggested is that the debtor stop paying their debts and use that money to save in the account.

Missing payments will most certainly have a negative impact on your credit score. Bad credit can follow you for years, making it difficult to purchase a home, a car, rent an apartment, or obtain a credit card.

Short-term solutions can lead to long-term problems, and this is one example of that being true.

The Tax Implications

When you have cancelled or forgiven debts, there is still one last bill to pay; your tax bill. Let’s say you owe $5,000 of credit card debt to American Express. You pay a debt settlement company, and they are able to get this debt “settled” for $1,000. You may feel like you just saved $4,000.

However, if a company forgives a debt of $600 or more, they will be sending you a 1099-C, as the forgiven amount is considered taxable income by the government.

Chances are, if you’re seeking debt settlement, you owe a substantial amount of money. Any money forgiven will be taxed, giving you another bill to pay. And if there is one creditor that always gets paid, it is the government.

Legal Ramifications

As we discussed above, you are more than likely going to cease payments on debts while saving money for settlement negotiations. While this may seem like the best course of action, this does not stop the collection process, which can include a creditor seeking a judgment.

If you are sued in civil court, your wages, bank accounts and social security payments can be garnished. And when thinking of credit implications, a civil judgment never looks good.

Financial Risks

While saving for negotiation, the principal on your debt is not being paid, and interest will continue to accrue. If you are in collection, then the interest you are piling up may be at a higher rate than your initial loan term.

In addition, almost all companies have fees and penalties they assess when a debt goes unpaid for a certain amount of time.

Creditors are not required to negotiate with you, and if a debt settlement company is involved, often they will not. If the settlement “plan” doesn’t pan out, you are left to pick up the, now more expensive, pieces.

Smarter Options Exist

While bankruptcy may not be the best solution for you, there are a multitude of ways in which discharging your debts can be handled. Some legal assistance programs exist to enable you to negotiate your debts without high fees and the risks outlined above.

Chapter 7 bankruptcy can be a viable option in helping you handle crushing debt. Call The Mitten Law Firm today for a free consultation, so we can point you in the direction to financial freedom.