We have all heard about settling taxes and debts on radio and TV instead of filing a Chapter 7 or 13 bankruptcy. But many Debtors find out a year or more later after paying debt settlement companies that they wasted time and money. So how does a Chapter 7 or Chapter 13 bankruptcy compare to debt settlement?

Too Good to Be True

Debt settlement companies ask you to pay them instead of the credit cards. After paying the Debt Settlement company a significant amount of money they will attempt to negotiate with creditors to settle these debts. What debt settlement companies do not tell you is that you can negotiate directly with credit card companies. Debt Settlement companies often file bankruptcy themselves taking your money with them (see how Ameridebt took the money and then filed bankruptcy). Most people are never able to complete their plans and file bankruptcy anyway. The damage to a credit rating will be about the same with Bankruptcy as debt settlement.

In one fradulent scheme, a debt settlement company had a debtor transfer all of a Debtors legal property to them to avoid the claims of creditors. They claimed that these legal documents would keep creditors from successfully suing him. The overwhelming number of people who sign up with debt settlement companies eventually file a Chapter 7 or 13 bankruptcy. In Debt settlement, any debt that is settled, is treated by the IRS as income for tax purposes. If a credit card company forgives $30,000 worth of your debt you will pay income tax on 30,000. Bankruptcy does not treat discharging the debt as income. The the Mortgage Forgiveness Debt Relief Act of 2007 excludes a personal residence debt from the law classifying cancelled debt as income. But only on purchase and renovation loans. Forgiveness still generates a tax if anay part of the loan was used for any other purpose such as to pay off consumer debt.

Debt settlement offers very little benefit but a Chapter 7 or 13 bankruptcy – eliminates debt with no tax consequences. See our Manual on how to file Bankruptcy. Nick C. Thompson Louisville Kentucky Bankruptcy Attorney

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