The hazards of working with debt settlement companies

Working with debt settlement companies instead of considering bankruptcy often leads to financial disaster.

Individuals that are hopelessly struggling with debt will often do almost anything to get out of their grim situation. Unfortunately, in their desperation, many turn to so-called debt settlement schemes that are heavily advertised on online and on late-night television. The debt settlement companies that operate these schemes promise to make their clients debt free in a short period of time by negotiating with their creditors to reduce the amount of debt owed.

Sadly, what the commercials don't tell you is that debt settlement schemes do not work for about two-thirds of clients, according to industry figures. To make matters worse, a Federal Trade Commission investigation found that the success rate is even lower-only about 10 percent of cases. As a result, most people that avail themselves of these services find themselves in a much worse financial position than when they started.

The facts about debt settlement

In reality, debt settlement entities are for-profit companies that charge very steep fees for their services, even if their efforts turn out to be unsuccessful (which they are in most cases). Unfortunately, most efforts at debt settlement are doomed from the beginning, as virtually all debt settlement companies advise their client to stop paying their creditors. By doing so, the company attempts to convince the client's creditors to settle the debt for what the client has already paid, which is considerably less than the original amount of the debt.

This has disastrous consequences, as creditors have no legal reason to work with the debt settlement company or settle for less than full payment. As a result, when clients default on their debts, they are hit with late fees, penalties and higher interest rates, opening themselves to more aggressive debt collection tactics, such as lawsuits and wage garnishments. Unfortunately, as mentioned above, this is the fate of the overwhelming majority of people that work with debt settlement companies.

In the unlikely event that a creditor chooses to work with a debt settlement company, the outcome for the client is far from rosy. In such cases, the client may be hit with a hefty tax bill, as tax laws consider the amount that was forgiven during the debt-reduction negotiations to be income.

Bankruptcy is an overall better way to go

Win or lose, most people who try debt settlement schemes end up filing bankruptcy. Sadly, if these persons had filed for bankruptcy in the first place, they would have already been in a much better position for several reasons.

First, filing bankruptcy is considerably less expensive than the services of debt settlement companies, which can charge up to 15 percent of the debt owed, regardless of the outcome. Clients that file bankruptcy in lieu of attempting debt settlement can save themselves the bother of having to pay both fees.

Secondly, unlike debt settlement companies, your creditors are legally bound to take a bankruptcy filing seriously. Once you file for bankruptcy, the automatic stay goes into effect, stopping all collection calls, foreclosures, garnishments and other collection attempts.

Finally, bankruptcy can provide real relief to your debt problem. During bankruptcy, your debts are either eliminated or made current over a period of several years. Once you complete bankruptcy, you can begin a new financial life again, free of most of your pre-bankruptcy debts. Unlike debt settlement companies, this relief is tax-free.

If you are struggling with unmanageable debts, it is wise to seek the advice of an experience bankruptcy attorney before your situation further deteriorates. An attorney can consider your unique situation and provide options that will genuinely help you overcome your struggles.

Keywords: debt settlement companies, bankruptcy