Debt Settlement–Yet Again?

Recently, I’ve seen commercials on television for yet another debt settlement company.  The tagline for this particular debt settlement company is that “you have the right to settle your credit card debt.  That’s good news for you; bad news for the credit card company.”  My reaction is that I cannot believe yet another company that will soon find itself in trouble for bilking consumers out of thousands of dollars is making yet another big advertising push.  You do not have a “right” to settle your debt with credit card companies.  I suppose, technically, you have the right to make an offer and they have a right to say, “no!”

Here at Bankruptcy Law Network, we have written about debt settlement companies on several occasions.  You can view previous blog posts here and here.  And here and here, too.   But, not only here at BLN have we written about debt settlement, other entities such as the NC Attorney General have written about debt settlement companies.  The New York Attorney General has, too.  So has the Minnesota Attorney General.  The Federal Trade Commission has also pursued debt settlement companies such as published here.  The Consumer Financial Protection Bureau (CFPB) has also gone after debt settlement companies.  In fact, the FTC offers a nice little blurb on debt settlement on its website.

As a bankruptcy attorney, sure, I have an interest in my clients and debt settlement firms do compete with bankruptcy attorneys for business.  But, as a bankruptcy attorney, I will offer you a range of options and as a professional, I will not try to pigeonhole you into a bankruptcy case if that is not what is appropriate for you.

But, between bankruptcy and debt settlement, a bankruptcy lawyer can often get rid of the debt for a fraction of what a debt settlement firm will charge.  Typically, debt settlement firms will charge 15% of the outstanding debt.  They will require payments into their office and deduct their fees out of the money you pay into their office.  A bankruptcy lawyer will require a flat fee and, after a consultation, can assure you (with no guarantee) that the debts will be discharged depending on your situation.  For typical consumer cases, $2,500 is a typical fee though this fee may vary depending on your location.

Between bankruptcy and debt settlement, folks are often concerned over their credit.  Bankruptcy will negatively affect your credit scores.  But, in order for a debt settlement plant to work, you have to stop paying the creditors which will mean that your credit score will take a big hit.

Then, we have the tax implications.  If a portion of a debt is cancelled or forgiven, the creditor will issue a 1099-C for cancellation of debt.  The cancelled debt portion will be attributed to you as income which may or may not affect your income tax liability.  So, if $20,000 of debt is cancelled and you get a 1099 for that amount, your tax liability could be up to $6,000.  Now, you can file a form with the IRS asserting that this cancelled debt should not be attributed to you as income but that is no guarantee.  Whereas, in bankruptcy, discharged debts are excluded from your taxable income. 

In my view, a debt settlement plan can work if you have no more than two or three creditors and if the amount of debt is relatively low.  If you can negotiate a settlement will all of these creditors for a reasonable amount at a reasonable fee to the negotiator (you can, of course, do it yourself).  If you have more creditors than just a small number, one creditor can say “no” and torpedo all that you hoped to gain.  Also, the greater amount of debt, you run the risk of a greater potential tax liability.

As we have stated several times here at Bankruptcy Law Network, on the sheer economics between bankruptcy and debt settlement, there is often no real comparison.  A bankruptcy case will achieve your goals for a fraction of the price without the potential negative consequences of a tax liability.

If you have significant debt and you are considering a debt settlement company, it would do you a world of good to talk to an experienced bankruptcy attorney near you about your options.