The lead article in the Economy Section of the June 18, 2010, issue of the New York Times offered a revealing insight into the practices of the “debt settlement” companies. Debt settlement companies state that they are positive alternatives to filing a bankruptcy case, suggesting that they have insight into “secrets that the credit card companies don’t want you to know.” In fact, the business models used by debt settlement vendors are fairly simple. As the Times article explains:
In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.
The problem, however is this…..What they don’t tell their customers is when you stop sending the money, “creditors get angry,” said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center.
Many of those creditors hire lawyers and sue to recover their money. We are seeing with increasing regularity credit card companies suing their customers who can not pay their credit card bills.
Additionally, if they do “settle” your debt for less than you owe, the creditor will issue a 1099 form to both you and the IRS. Forgiveness of debt outside of bankruptcy is income for tax purposes. However, forgiveness of debt in bankruptcy is not taxable.
Filing a Chapter 7 or Chapter 13 bankruptcy is an honorable, legal, constitutional and correct way of addressing too much debt.
Please consider seeing a bankruptcy lawyer, especially a bankruptcy lawyer who is a member of the National Association of Consumer Bankruptcy Attorneys, to give you legal advise when you have too much debt. When a consumer has a debt problem, he or she has a legal problem and needs to consult with a bankruptcy attorney in order to receive legal advise on how to handle that problem.