Debt settlement is often considered as an alternative option to filing bankruptcy to deal with credit card debt. The Federal Trade Commission has issued warning about using a debt settlement company because they are frequently scams. The Federal Trade Commission even passed a rule making it illegal for companies offering debt settlement services to charge an upfront fee. Even if a legitimate debt settlement company exists, consider the consequences of debt settlement compared to bankruptcy:
How Debt Settlement Hurts Your Credit:
Debt Settlement: The debt settlement process will harm your credit for years. Creditors will report your delinquent account until it is paid. Your report may identify settled accounts as paid less than 100%, which also adversely affects your credit score.
Bankruptcy: Any debt included in a bankruptcy needs to be updated on your credit report as discharged with a zero balance. Bankruptcy stops adverse reporting so your credit report can improve.
How Much Debt Negotiation Costs Compared to Bankruptcy:
Debt Settlement: The typical debt settlement company will claim to resolve your debt with a lump sum payment of between 20% and 80% of the debt. This claim is not always true. The Federal Trade Commission says: “The truth is that there is no guarantee that any creditor will accept partial payment of a legitimate debt.”
Bankruptcy: In most bankruptcy cases you pay nothing to unsecured creditors and the attorney fees are modest.
Debt Settlement May Cost You In Taxes:
Debt Settlement: Any settled debt will have tax consequences and you may have to pay the IRS.
Bankruptcy: There is no tax liability for a debt discharged in bankruptcy.
How Collections and Lawsuits can Continue with Debt Settlement:
Debt Settlement: You may be sued while you or your representative is attempting to settle your debt. The Federal Trade Commission states: “The truth is that creditors may have the right to sue you to recover the money you owe. And sometimes, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. “
Bankruptcy: All lawsuits are prohibited once your bankruptcy case is filed.
Debt Settlement is Risky:
Debt Settlement: Some debt settlement companies are disreputable and the promises they make are misleading. The FTC says: “Debt negotiation can be risky, and it can have serious, long-term consequences for your credit report and your ability to get credit in the future. “
Bankruptcy: The bankruptcy process is authorized by the United States Constitution and its laws are written by Congress. There are risks in bankruptcy, but they are more predictable.
Debt Settlement Takes a Long Time:
Debt Settlement: The debt settlement process can take more than a year. The general rule is: the longer you don’t pay, the better the settlement. Creditors are reluctant to accept less than full payment unless they believe that you may file bankruptcy. Plus, once you reach an agreement, you need to make the payments.
Bankruptcy: The typical chapter 7 bankruptcy case takes less than six months.
Most people hate the idea of filing bankruptcy and often see debt settlement as an attractive option. The facts show it may be worse for your credit, cost far more, and cause more stress dealing with collection calls. My advice is to stay away from anyone who promises that they can negotiate to reduce your debts without seriously hurting your credit and costing you a lot of money.
If you are faced with debt problems serious enough to consider hiring a debt settlement company or lawyer, you may want to look at the option of filing a bankruptcy instead. We are a California Bankruptcy Law Firm and represent people throughout the state of California. You can meet with us for free and find out for yourself what a difference talking to an experienced California Bankruptcy Lawyer can make. Feel free to call us at 818-714-2200.