Most Americans these days are affected by the downturn in the economy. As the economy continues to struggle, people are always looking for a deal even when it comes to debt relief. When people get buried under a mountain of credit card debt and are looking for a way out, they typically look at debt settlement over hiring a bankruptcy attorney because they think it’s cheaper. While the initial costs of debt settlement seemed cheaper to pay a bankruptcy attorney retainer fee, the overall long-term cost might be a lot higher depending on the amount of debt the individual is trying to eliminate.
Most people have a rough idea how filing bankruptcy works but many don’t understand the debt settlement business model. Although on the outside, it appears to be beneficial for many individuals. When it comes down to it there is really only a small select group of individuals that truly benefit from using debt settlement over filing for bankruptcy.
There are many flaws in how debt settlement program works. First of all, the idea starts by building up a war chest of money to be held by the debt settlement company. Second, while the individual’s strongbox is being filled with your money, the company will do nothing until there is enough money there to negotiate with creditors. This is where the sales pitch of protecting your credit goes out the window because the debtor’s bills are no longer being paid, creditors begin the collection process and start ruining the individual’s credit due to late pays. The longer it takes to build up enough money, the worse the individual’s credit gets. This is one of the largest flaws in a debt settlement program is then making the assumption that the creditors will be willing to negotiate and settle the debt after not paying their payments for a long period of time. Since this industry is unregulated, many people in the process of building up their funds have had the companies disappear. Lastly, if the debt is finally settled by the company, many creditors send the debtor a IRS Form 1099C making the debtor pay income tax on the amount that was forgiven by the creditor. When filing bankruptcy, the debtor has no tax liability whatsoever from deficiencies, foreclosures and repossessions.
This is why I believe that hiring a bankruptcy attorney and filing for bankruptcy is much safer and cheaper in the long run. While debt settlement does have its place, it’s better to speak with a bankruptcy attorney and let them be the judge of sending the individual to a debt settlement company because filing bankruptcy is not in their best interest.