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Debt settlement probably a bad alternative to bankruptcy

By Liz Weston NerdWallet.com, Aug 30, 2017 (a summary from South Bend Tribune)

Many people believe that hiring a company to settle their debts is better on their credit, will cost them less in the long run and will generally be better than a bankruptcy.  This is what the debt settlement industry would like you to believe.  The following are some clips from an article by Ms. Weston which details the real cost of debt settlement.

The pros and cons of credit card debt settlement

Debt settlement is not as consumer-friendly as the industry presents it, and some of the people who praised the companies didn’t fully understand their alternatives or the longer-term consequences of settling debt (see a former employee’s quote below).

  •  One woman didn’t realize she would face a tax bill on the forgiven debt.
  • A man opted against bankruptcy in part because he erroneously thought he would lose personal possessions.
  • Another woman was shocked at how far her credit scores tumbled and how much interest she was charged when she applied for a car loan.

Where debt settlement falls short

debt settlementHere are some of the biggest problems with debt settlement:

  • If you pay less than the full debt you will be taxed on the amount “forgiven”.  This is referred to as forgiveness of debt.  (Note – this does not usually happen in bankruptcy).
  • Negotiations can take years (usually three to four years). Meanwhile, customers risk being sued over their debts.
  • The math often doesn’t work. The total cost of the settlement can equal 90 percent or more of the original amount owed.
  • Many debt settlement companies unfairly demonize bankruptcy. In reality, most chapter 7 bankruptcies take a few months and the filer can keep most of their assets.
  • Both debt settlement and bankruptcy drop credit scores into the mid-500s. Credit scores can begin to recover immediately after either process is complete (chapter 7 bankruptcy typically takes months, while debt settlement typically takes years.) Plus, bankruptcy halts collections activity, including lawsuits, and can end wage garnishments.

MUSINGS BY DIANE:

The only company I recommend for a debt workout is National Foundation of Consumer Credit Counselors NFCC.org.  This is the only true non-profit that I know of.  There have been so many scams over the last 40 years that I just gave up trying to find a legitimate alternative to bankruptcy.  It was not worth the pain and suffering for my clients, who ultimately had to file bankruptcy after throwing away thousands to these scams.

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Diane L. Drain

Diane L. Drain, bankruptcy attorney, retired law professor, mentor and community spokesperson.

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