Bankruptcy or a Debt Settlement Program? Which is Right For You?


Thinking about using a debt settlement program as a way to avoid filing for bankruptcy? 

A debt settlement program is typically offered by a for-profit company. It requires you make a set payment into their program every month instead of to your creditors. It may be located half way across the United States. Once a large enough fund is created they attempt to negotiate your debt downward. The risk of these of programs are you may have trouble making the monthly payments long enough to get any of their debts settled. Creditors have no obligation to agree to negotiate a settlement. The advice to stop sending payments directly to your creditors may have a negative impact on your credit report equal to, or even, worse than a bankruptcy filing.

Potential Tax Liability

Depending on your financial condition, any savings you get from the debt relief service might be considered taxable income in the eyes of the IRS and you will end up paying taxes on the amount of money reduced.

The Risks In a Debt Settlement Strategy

Some companies offering debt settlement programs overstate what they can achieve. Guarantees to settle all of your credit card debts for a very low percentage rate are unrealistic. Companies may also try to collect their fees from you before they’ve actually settled any of your debts. This is a practice prohibited under rules promulgated by the Federal Trade Commission. Participation in a debt settlement program does not protect you from further collection activities by your creditors. Unike in a bankruptcy filing, you may get sued while you’re participating. Many people end up filing for bankruptcy after having an unsuccessful experience with a debt settlement program.

If you are experiencing financial stress, and are having trouble making ends meet each month, please call our office to schedule a free consultation to discuss your bankruptcy options.

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