In our third blog entry on consumer bankruptcy law, we will discuss a few hidden dangers of the nationwide commercial debt settlement industry. Debt settlement is often touted in advertisements as a means of avoiding bankruptcy. However, like all things that sound too good to be true it usually is. We will discuss debt settlement and when it should be considered and when it shouldn’t in North Carolina.
Hidden Danger #1: TAXES!!!!
The #1 reason to be wary of a debt settlement company is the fact that they often leave out one very valuable bit of information. The settlement is TAXABLE INCOME!!! For example, let’s say a consumer has racked up $30,000 of credit card debt after a medical condition has left them out of work for months. Now let’s say that consumer wants to settle with the credit card company since he or she obviously can’t pay the remainder while out of work. Assume the consumer gets a sympathetic person to work with and manages to settle for only $5,000; now they will feel they are in a much better position to go forward and can pay the $5,000 in a reasonable time.
The credit card company will take the $25,000 loss and write it off on their taxes. The debtor will receive in the mail a 1099-C tax form from the credit card company for $25,000 worth of income. Now the debtor, instead of being liable to the credit card company, is liable to the IRS for taxes on the discharged debt. In this scenario the debtor is now almost certainly in a worse position. To make matters worse, the money now owed the IRS is not dischargeable in bankruptcy, should the debtor decide on that option.
Hidden Danger #2: Settlement Companies Can Leave Your Credit in Ruin Before They Settle
For those hoping to save their credit score by avoiding bankruptcy the settlement companies will often make the debtors delinquent before they settle. Thus the debtors are left open to judgment liens by the credit companies who can put liens on the real property of the debtors. Also debt settlement, like bankruptcy, will go on a credit report for 7 years after deal is reached.
So should a debt settlement be considered over a bankruptcy? My suggestion is only pursue a settlement if the amount that’s sought to be settled is low enough that the inevitable tax bill will not harm the debtor. If the debt can be paid in full by all means pay it instead of making a settlement. Consult a financial advisor such as a certified public accountant (CPA) before attempting a settlement. Also, if you do decide to settle, save yourself the hassle of dealing with a debt settlement company by either negotiating with the creditor directly or hiring an attorney that specializes in debt settlement.
If you’d like more information about debt settlement and bankruptcy please contact us.
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