Updated: Oct 6, 2020
You may hear advertisements on the radio, on TV or on the internet offering so-called “debt settlement” options. If you call one of these companies, you’ll be given a hard sell by a professional salesperson and lots of pressure to sign up. Before you go this route, here’s some information on what exactly these companies are selling that you should know before moving forward.
What is Debt Settlement? - Debt settlement companies have largely started cropping up in the past few years as an “alternative” to bankruptcy. In theory, these companies are supposed to act as a sort of savings account while you save up a large lump sum of money. Once all the money is saved up, the company is supposed to negotiate with creditors to pay off unsecured debt. In reality, these companies will often charge you excessive fees that come out of your "savings" BEFORE they will even start negotiating on your behalf (some states have outlawed these companies because of these fees) and offer NO legal protection whatsoever from lawsuits, garnishments and/or collection calls.
Why is this a bad option? – Debt settlement companies offer no legal protection while you are in their “plans”. They will tell you to stop making payments on your debt and turn the money over to them to put in your “account”. This is a bad idea because as soon as you stop making payments, your creditors can come after you by initiating lawsuits and wage garnishments. Many people end up in more financial trouble after getting involved with these companies than they were beforehand. Furthermore, these companies usually deduct a large portion of the money you turn over to them for your “account” for their fees before they do anything on your behalf.
Tax Consequences – Another surprise you’ll find if you go through with any debt settlement programs are the tax consequences on forgiven debt. Forgiven debt is taxed by the government as “income” via a 1099C tax form. For example, if you settle your $5,000 debt with a debt settlement company for $3,000, you will then have to claim the remaining $2,000 that was forgiven on your taxes as income and it will be taxed accordingly. This can result in large tax bills!
Debt Settlement Success? – The success of debt settlement companies actually settling your debts is extremely low. Estimates are from only 2% of the people that get involved with these companies actually manage to settle their debt, with most people dropping out of these programs within 4 months as they start getting harassed by creditors or having their wages garnished. They also lose hundreds, sometimes thousands of dollars they can’t get back in “fees” these companies charge them. If you think debt settlement could be a good option, it’s best to discuss it with a licensed attorney that offers those services. If you are ever suspicious of a company, it is helpful to run a Google search on the internet with the name of the company along with the word “scam” to see if anyone has reported trouble with the company.
Legal Options for Debt – Meeting with a licensed attorney is the first thing you should do if you are in debt, an attorney can discuss your legal remedies to debt problems. Bankruptcy is an excellent option, especially if you’ve previously been involved in a debt settlement program. Bankruptcy allows debtors to keep their property while paying back none or only a small portion of their debt. Bankruptcy also offers legal protection from collection calls, wage garnishments, repossessions and foreclosures. In some cases, it is even possible to recover a portion of garnished wages.
Call Attorney Allison Greenlee Korr to discuss your debt options today 269-381-4471
“We are a debt-relief agency. We help people file for bankruptcy relief under the Bankruptcy Code”.