Is Debt Settlement a Good Idea?

We know that most people WANT to pay their bills and most will do anything to avoid filing for bankruptcy. Even a credit counseling course that is required to be completed before you can even file for bankruptcy will possibly recommend a bankruptcy alternative like a debt settlement program. On the surface, debt settlement sounds like a good idea, because you can avoid bankruptcy, right? Debt settlement companies may say they can reduce your credit card debt by 50% and get you debt-free in three years. What they do not tell you are all of the risks and negative effects of using their “services.” Why do they not tell you everything? Debt settlement companies, and for that matter, the credit counseling company that recommended debt settlement in the first place, do NOT have a fiduciary duty to you as the client. That means they are not transparent about their services, and they can (and often do) LIE to you. They do not have to tell you what they are doing or not doing on your behalf and they are not required to act in YOUR best interest.

Contrast this with the services of an attorney. An attorney is ethically and legally required to act in YOUR best interest. Attorneys DO have a fiduciary duty to their clients. They are transparent about what they are doing on your behalf, cannot lie to you, and are required to keep you informed about developments in your case.

Debt settlement companies are also extremely expensive. Here is an example: say you owe $10,000 per creditor to five different creditors for a total debt of $50,000. The debt settlement company will require you to pay them a setup fee of several hundred dollars to get started, and for this example, let’s say it is $300 to engage their services. They will then tell you to stop paying your creditors. Settlement offers only work if it appears you won’t or can’t pay at all. They don’t tell you that this action increases your interest rates, accumulates more fees to the accounts, and has a negative impact on your credit score. Then, they will ask you to create a savings account that you deposit cash into for use as settlement funds.

It will likely take you several months to build up enough savings for a lump-sum offer. While this settlement fund is being built up, you have to pay a $100 monthly maintenance fee to the debt settlement company. Say it takes you seven months to build up $8,000, while you’ve already spent $1,000 with the debt settlement company ($300 startup + $700 in monthly fees). With a lump-sum offer available, the debt settlement company contacts all five of your creditors and tries to get them to accept less than what is owed on the debts. Maybe one of your creditors agrees to settle for $6,000. The debt settlement company is also going to take a percentage of the original $10,000 debt you owed to this particular creditor, so they charge you $2,000. Now, you have one less creditor, but your $8,000 is gone and you still have four other creditors. You have settled a $10,000 debt at the cost of $9,000! Remember the setup and monthly fees?

Did the debt settlement company mention to you that since the $10,000 debt was settled for $6,000, the creditor can issue you an IRS 1099c tax form, meaning you will possibly owe income tax on the $4,000 debt that was forgiven? Say with your income tax deductions you only pay an effective tax rate of 10 percent, but that is still $400! You’ve now settled a $10,000 debt for $9,400 of your hard-earned money over a period of seven months. You still owe $40,000. It will take seven more months to build up another $7,000. Meanwhile, your credit score reflects ALL of the worst indicators and you probably have a lower score than before you started debt settlement!

If you would have filed for bankruptcy in Oklahoma, it would have cost you less than $2,100. It would have been over in 90-120 days, not three years. Most, if not all, of your debt would have been discharged. You would NOT owe federal or state income tax on the discharged debt, and you would already be rebuilding your credit.

Debt settlement is rarely a realistic option to solve your financial problems. It requires cash for a lump sum payment to settle with each creditor. All of your creditors must agree to accept less than they are owed, which is very difficult to achieve, and not all of your creditors will be prepared to deal. In fact, at least one of the creditors will probably file a civil lawsuit against you and can then obtain a wage garnishment against your paycheck. Debt settlement takes a very long time to complete compared to filing for bankruptcy, and also operates on the assumption that there will be no negative financial changes in your future. A debt settlement company might convince a creditor to accept less than the total debt you owe, but then that same creditor can issue you an IRS 1099c tax form, increasing your income tax burden. You may have also traded an unsecured creditor, who cannot take money from your bank account without first filing a lawsuit, for the ultimate creditor, the IRS, who can take money from your bank account without filing a lawsuit.

The Henson Law Firm, P.L.L.C. are bankruptcy attorneys in Tulsa, Oklahoma who work closely with individuals and families who are struggling to pay their bills. We can help you secure your financial future.

If you are considering signing up or working with a debt settlement company, speak to a qualified Tulsa debt relief lawyer at the Henson Law Firm, BEFORE you enter into any debt settlement agreement. Call 918.551.8995 or click “Schedule a Free Virtual Consultation” on our website to setup a FREE and confidential initial consultation

*We are a debt relief law firm in Tulsa, Oklahoma.

*We help people file for bankruptcy relief under the Bankruptcy Code.