Most of us naturally look for the easiest way out of a difficult situation. Whether we are stuck with one difficult creditor or drowning in debt. Those debt relief agencies that you hear advertised on the radio might seem like the best solution to your problem. Hearing promises to “take care of your debt for pennies on the dollar” may seem like the easiest way out. As tempting as this may sound, this shortcut can lead to disastrous results.
Unfortunately, there are debt relief agencies that make promises they cannot deliver. They promise to settle your debt for pennies on the dollar. What might be left out of their sales pitch is that their fees range from 20 to 50 percent. No company is going to help you for free. Their fees are money that could be used to actually pay back the debt or to hire a qualified bankruptcy attorney. The last thing you need is more fees when your debts are already a burden.
Another common obstacle is that you’ll need to have a lump sum of money available to settle your debt. Most debtors don’t have this or they would already be using it to pay down their debt. If a creditor is willing to settle a $5,000 debt for only $2,500 that sounds like a great solution. But they generally require that lower amount to be paid as a lump sum and will not accept payments.
But what happens while you are paying your monthly fees to the debt relief agency? The agency is collecting your money in hopes to save up some “lump sums” to offer them to the creditors. But in the meantime, your creditors are not being paid at all. This often leads to lawsuits. The creditor may file suit to try to collect on the debt via wage garnishment, bank levy, or even liens on your real estate. Hiring a bankruptcy attorney will stop these types of proceedings as well as all other collection efforts.
If you do manage to successfully settle a debt, then this means the creditor is willing to accept a lesser amount than originally owed and will then write off the remaining balance. In our $5,000 debt example, if the creditor agrees to a settlement of $2,500, they will collect that payment and write off the other $2,500.
But this means that they will send you a 1099 form at the end of the year for your income tax preparation. You will be required to pay income taxes on the debt that was written off. If this is simply a $2,500 liability it may not alter your taxes much but if you have several of these, then you could end up owing income taxes you were not prepared to pay. Filing bankruptcy will prevent these types of tax liabilities.
Filing bankruptcy will deal with all your debts in one proceeding. Within a matter of months, the seemingly endless cycle of debt can be contained and discharged. In general, the cost to file bankruptcy will be less than the money lost with a debt relief agency.
It should also be noted that your creditors do not have to agree to a debt settlement nor do they have to stop their collection efforts once you agree to pay a debt relief agency. The only way to legally stop creditor harassment is to file a bankruptcy which will implement the automatic stay. This stay legally prohibits the collection of debts.
Using a debt relief agency will also negatively impact your credit. You will be asked to stop paying your minimum payments. This will lead a lot of negative credit reporting. If you should settle a debt this will also be on your credit report. Bankruptcy will impact your credit but the clean slate of a bankruptcy discharge will allow for credit rebuilding at a much faster pace.
It is rare that a debt relief agency will be the best resolution to a consumer debt problem. There is no legal protection from collections, there is no guarantee your debt can be settled, and their fees will often cost more than a bankruptcy filing. If a debt relief agency is truly the better solution an honest and knowledgeable bankruptcy attorney will advise you of this.
It is important to get all your facts before agreeing to either debt settlement or bankruptcy. Scheduling a free bankruptcy consultation is an excellent resource to help you compare your options.