Offers from debt settlement companies can seem so alluring to those in Texas struggling with unmanageable debt. For one lump sum payment, these companies offer to work with a debtor's creditors to forgive the remaining debt. Unfortunately, oftentimes these offers are too good to be true.
For example, negotiations between a debt settlement company and a person's creditors could take years. And, while debtors are told not to pay their bills while negotiations are ongoing, they could still be sued by their creditors. Chapter 7 bankruptcy, however, can be completed in months and halt collection activities, saving time, money and stress.
Also, debt settlement companies may not be able to get all of a person's debt forgiven. Often the debts are settled for around half of the current balance, which includes interest and late fees. Moreover, any forgiven debt is considered taxable income by the Internal Revenue Service. Between the remaining debt and associated taxes, the costs of resolving debts using a debt settlement company can be as much as 90 percent of what the debtor originally owed.
In addition, debt settlement companies often misrepresent what will happen if a person files for Chapter 7 bankruptcy. They may claim a person will lose all their property. However, there are many exemptions that allow a person to keep many of their personal possessions. In addition, a debt settlement company may claim that if you file for Chapter 7 bankruptcy your credit score will take a big hit. In actuality, settling through a debt settlement company or filing for bankruptcy will still generally lead to a credit score somewhere in the mid-500s. However, oftentimes people can bounce back from this quicker if they file for Chapter 7 bankruptcy, since a Chapter 7 bankruptcy filing only takes months to complete, while debt settlement could take years. Also, once a person files for bankruptcy, his or her debtors can no longer take actions to collect on the debt.
So, while debt settlement may seem attractive, many people are better off filing for Chapter 7 bankruptcy if possible. In the end, it is important to weigh all your options carefully, to determine what actions are best for you. It may help to consult with an attorney, so that you can make informed decisions.
Source: South Bend Tribune, "Debt settlement a bad alternative to bankruptcy," Liz Weston, Aug. 30, 2017