Settle Debts or File For Bankruptcy Protection?

Sometimes I think people read our blog and wonder if everything we say is designed to get people to stop trying to pay their debts and just file for bankruptcy protection.  Then I come across a story like this about the downside of trying to settle debts either with or without involving a “debt settlement” company.

The article tells an all-too-familiar tale of spending money with a debt settlement company and then having to do the work yourself that you paid them to do on your behalf.

We always warn clients that companies and individuals offering debt settlement are often running afoul of the law — they are interested in making money off you, not actually giving you relief.

We always disclose to clients that  debt settlements often give rise to debt forgiveness income, and that income can be taxable. Credit card settlements almost always give rise to debt forgiveness income; the credit card company will inform the IRS of the amount of the debt forgiven. Factor in the tax consequences of settling when considering debt settlement. If you cannot pay the taxes you will incur with the settlement, we do not recommend you enter into an agreement.

Credit card companies typically require a lump sum settlement paid in no more than four monthly installments, so debtors hoping to settle need to have a pile of cash at the ready. We NEVER advise clients to take money from retirement plans to settle their debts, a point which is also reinforced by the Star-Telegram article.

If you are unsure which direction is best for your given financial circumstances, call a qualified bankruptcy attorney for a credit card debt counseling  or a bankruptcy counseling session.