How is Bankruptcy Different from Debt Settlement?

Posted on January 10, 2014 at 7:23am by

You have probably seen the television commercials: Debt settlement or consolidation firms promising to solve your debt problems for pennies on the dollar. Unfortunately, for most consumers, the end result does not match the promises made.

At The Sader Law Firm in Kansas City, Missouri, we assist individuals, couples and businesses solve their debt problems and look forward to a brighter financial future. Before you spend hundreds or thousands of dollars on a debt settlement or consolidation program, contact us for a free initial consultation to explain your bankruptcy options.

How Does Debt Settlement or Consolidation Work?

With typical debt settlement programs, you make payments to the debt settlement company instead of your creditor. After you have paid the company a required amount, it will negotiate with your creditors. Unfortunately, your creditors aren’t required to negotiate with the debt settlement company and many refuse to do so. Your creditors are free to turn your debt over to a collection agency, sue you, and garnish your wages or bank account. Debt settlement cannot legally stop the creditors from engaging in collection activities against you! Unfortunately, it is quite common for us to receive phone calls from people who have already turned over thousands of dollars to a debt settlement firm only to ultimately file for bankruptcy.

Even if a creditor agrees to accept less than you owe it, the company will issue a Form 1099-C to you and the Internal Revenue Service at the end of the year for the canceled debt. The IRS treats canceled debt as income, so you may have a significant tax bill to pay.

For many people, bankruptcy offers a better solution to debt problems:

  • Once you file bankruptcy, creditors must immediately stop all efforts to collect on debts. This will put an end to harassing phone calls, lawsuits and garnishments.
  • Debts discharged in bankruptcy are tax free.
  • Creditors are forced to accept whatever money you can afford to pay in Chapter 13 bankruptcy. In a Chapter 7 bankruptcy it is not uncommon for unsecured creditors (such as credit card bills) to receive nothing.

Give The Sader Law Firm a call at 816-281-6349. During our free initial consultation, we will discuss your specific situation to determine what your bankruptcy options are, and whether or not you should consider bankruptcy as opposed to debt settlement.

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