What are the disadvantage of debt settlement vs bankruptcy? 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 they wasted time and money. So how does a Chapter 7 or Chapter 13 bankruptcy compare to debt settlement?
High failure rates
Debt settlement companies ask you to pay them instead of credit cards. After paying the Debt Settlement company a significant amount of money they will attempt to settle these debts. However, they have little or no power to force credit card companies to accept offers. As a result, most debt settlement companies cannot force below settling for 50% or less. Bankruptcy court judges issue federal court orders to often repay 10% or less. You complete a Chapter 7 bankruptcy over 99% of the time. But people rarely successfully complete debt settlements which are repaid over several years.
What you are not told.
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 these debt settlement plans and file bankruptcy anyway. The overwhelming number of people who sign up with debt settlement companies eventually file a Chapter 7 or 13 bankruptcy.
People rarely complete debt management plans. If you are unable to complete a Chapter 13 you can often convert to Chapter 7 or obtain an early discharge. If you don’t complete debt settlement you simply lose the money paid and still owe the debts. Often you may owe more than what you originally owed after the debt settlement company takes charges and interest continues to accrue.
Damage to your credit rating is less with bankruptcy.
The damage to a credit rating will be about the same or less with Bankruptcy as a debt settlement. Either way, debts are not repaid. However, at the end of the bankruptcy, a debt is normally reported as account closed. Sounds more like it was paid. A debt settlement is reported as charged-off or unpaid.
Some debt settlement companies are frauds
In one fraudulent scheme, a debt settlement company had a debtor transfer all of a debtor’s legal property to them to avoid the claims of creditors. They claimed that these legal documents would keep creditors from successfully suing him. Then they sold his assets.
Debt Settlement vs Bankruptcy and taxable income
In Debt settlement, any debt that is settled is treated by the IRS as income for tax purposes and the lender issues a 1099-c as if you earned income. If a credit card company forgives $30,000 worth of your debt, you will pay income taxes on 30,000 just as if you earned $30,000. Bankruptcy does not treat discharging the debt as income. Even if a 1099 is issued the tax code exempts debts discharged in a bankruptcy from income taxation.
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