Think twice before attempting to work with debt settlement companies

Using a debt settlement company to address your debt problem leads to disaster more times than not.

If you are “up to your ears” in debt, you will likely try almost anything to stop those unpleasant collection calls. You may be familiar with debt settlement services that are advertised online and on television. These services promise to help you by negotiating with your creditors and settle your debt for a fraction of what is owed. As a result, you may consider them a better alternative to filing bankruptcy. However, the reality is that they are a bad idea that can compound your financial difficulties in the majority of cases.

Debt adjusters and adjusters/companies that offer mortgage modifications are illegal in New Jersey unless they are a non-profit corporation approved by the Department of Banking. The companies that advertise for business are usually not approved by the Department of Banking. It is a fourth degree crime in New Jersey to act has a debt adjuster without being approved by the New Jersey Department of Banking.

According to a recent Federal Trade Commission investigation, debt settlement companies are not successful in lowering their clients’ debt in the overwhelming majority of cases. The investigation found that such services have a 90 percent failure rate.

In fact, using debt settlement services as a solution to your debt problem can leave you in a worse position financially than you were before. Since debt settlement companies are for-profit enterprises, they charge you a fee for their services. In the majority of cases, this fee is exorbitant-as much as 15 percent of the debt you owe. This fee is charged regardless of whether the service is successful in actually reducing your debt.

In addition, the debt settlement process is suspect at best. During this process, virtually all debt settlement companies advise you to stop making payments on your debts so they can use your nonpayment as leverage to convince your creditors accept a percentage of what you owe as full payment.

In doing so, debt settlement companies can cause you to suffer a variety of horrible outcomes for the simple reason that your creditors are not legally obligated to work with the company. As a result, once you stop paying your bills, your creditors start charging you late fees and interest on your debt. Additionally, your nonpayment may push your creditors to begin more aggressive collection tactics such as lawsuits, repossessions, and wage and bank account garnishments.

Even if you are among the successful 10 percent of clients that have their debts reduced, you can end up owing money to the Internal Revenue Service. Under the tax code, the amount that is forgiven in debt settlement negotiations is taxable as ordinary income. As a result, many are forced to trade one debt for another.

Consult a bankruptcy attorney to learn your options

Regardless of whether you are successful or unsuccessful, debt settlement can push you into what you were trying to avoid-bankruptcy. Unfortunately, if you had filed bankruptcy instead of turning to debt settlement, you could already be in a better position.

Unlike debt settlement, your creditors must cooperate with you during bankruptcy. Once you file bankruptcy, all collections calls, garnishments, lawsuits and other collection attempts are immediately halted. Then, depending on the type of bankruptcy that your file, most of your debts are discharged outright or repaid over three to five years. Any debts that are eliminated are tax-free. Once you have finished the bankruptcy process, you start over with a clean slate financially.

To learn more about how bankruptcy can help you with your debt problem, consult an experienced bankruptcy attorney. An attorney can listen to your concerns, give you a complete and honest overview of the process, and ensure that you are put on the road to financial recovery as quickly as possible.

Keywords: debt settlement, bankruptcy