If you have looked at solutions for resolving your debts, you may have come across services that offer debt settlement. Debt settlement is a process where debtors attempt to negotiate lower payments or loan forgiveness with their creditors. However, there are dangers of debt settlement that can hurt people who are struggling financially.
While it is possible to forgive or reduce debts by using debt settlement, there are some downsides. We can make brief comparisons between debt settlement and bankruptcy to argue our point.
- Unlike bankruptcy, debt settlement cannot issue automatic stays. After filing for bankruptcy, an automatic stay is issued and creditor actions temporarily cease (such as collection agency calls, foreclosure and wage garnishments).
- Debts forgiven after the settlement process are considered taxable income by the IRS. This means you can be subjected to a tax bill. However, debts discharged in bankruptcy are not considered taxable income.
- Some debt settlement services may cause you to accumulate more debt. Most debt settlement services are not operated by attorneys. In other words, if you decide on debt settlement, you may be dealing with people who do not abide by a high standard of ethics. Debt settlement services may be motivated by profit instead of ensuring you can exercise your legal rights.
- Debt settlement companies may use illegal business practices, such as requiring upfront fees for services.
Why It May Be a Mistake to Choose Debt Settlement Over Bankruptcy
We understand that everyone is going to have a different financial situation. In cases that involve unpayable debts worth several hundred dollars, debt settlement may be the right choice.
However, do not make the mistake of choosing debt settlement over bankruptcy because you are afraid of causing permanent damage to your credit score or finances. Keep in mind, there is no such thing as a permanent credit score.
If you have thousands of dollars in unpayable debts and are being subjected to wage garnishment or foreclosure, filing for bankruptcy can protect your most important assets. Debt settlement cannot.
The Kansas City bankruptcy attorneys at The Sader Law Firm can help people find solutions for managing difficult financial situations.