Most likely you have some familiarity with companies offering debt settlement programs as an alternative to filing for bankruptcy. You may have seen commercials on television offering to reduce your debt 50% or more and offering a plan to get you out of debt within a short period of time. It almost seems too good to be true and, generally speaking, it is. Often a person will opt for such a program because they believe it will not harm their credit as much as a bankruptcy filing. In reality, a debt settlement program can be far more detrimental to your credit score than a bankruptcy and prolong the misery of being overwhelmed by debt.
A debt settlement program generally works like this: After providing a debt settlement company with information as to who and how much you owe, the company generates a payment plan for you and instructs you to stop making payments to your creditors and begin making payments to them while they are negotiating settlements with your creditors. The debt settlement company will collect a fee from the moneys you are paying into the plan that consists of either a percentage of your monthly payment or a percentage of the settlement deal they reach with each of your creditors. It sounds great but the devil is in the details and a lot of these companies will not fully inform you of how the system really works. First, by instructing you to stop paying your creditors, the debt settlement company is intentionally pushing your account into charge off status with the creditor with the hope the creditor will, at that point, then be willing to settle for a reduced amount of the debt. This charge off status on the account will, most likely, result in a negative item on your credit report that can remain on the report for up to seven years. In addition, there is no guarantee the creditor will agree to accept a reduced settlement even after the account has reached charged off status. Second, once you stop making payments to your creditors, you will likely experience collection calls from your creditors and, ultimately, collection lawsuits. The reason? Most debt settlement companies do not negotiate these settlements with your creditors all at one time but, instead, one by one. While one creditor is being paid you will likely be subject to collection efforts by other creditors who are receiving nothing. And these collections efforts can result in judgments that can become liens against your property or subject your wages or your bank accounts to garnishment. Finally, even when a reduced settlement is reached with a creditor, the amount of the reduction can be turned into the IRS as debt forgiveness income and subject you to a tax consequence.
Bankruptcy can often be a far better option than a debt settlement program. It is a process that has a defined beginning and end with protection from collection efforts from your creditors while you are in that process. While it will also be a negative item on your credit report, your credit score can begin to improve as soon as the bankruptcy is completed. If you are considering a bankruptcy option and need assistance please contact one of our locations nearest you for a free, confidential consultation with one of our experienced, licensed attorneys.