Settling Debt

Is settling my debts better than bankruptcy?

People are desperate to pay their bills! Every day we see people who have paid lots of money to companies that promised to get their debt reduced, paid off at a lower interest rate, or settled for pennies on the dollar — and that money has been COMPLETELY WASTED. Either the “debt reorganization” company has kept all or most of their money for “fees” (or stole it outright), or only a few of the creditors would go along with the reduction plan.

Bankruptcy is different — it has the force of law behind it. Chapter 7 and Chapter 13 bankruptcy filings affect creditors differently, but the creditors must obey the law, or they face penalties from the court. Chapter 7 gets rid of the debt, completely, without you having to pay a penny to the creditors. Chapter 13 reorganizes the debt and forces creditors to cooperate with a payment plan the YOU propose.

Bankruptcy stops interest, late fees and over credit limit fees, a feat that no “debt settlement” or “debt reorganization” company can claim!

Don’t give money to any company that claims to be able to reduce or settle your debt, unless you talk to a bankruptcy attorney first! We see the victims of these scams everyday — they are good, honest people who want to pay their debts — even to the point of trusting internet thieves and scammers. There are reputable debt management companies, but finding one among all of the crooks is just plain luck. Congress, the IRS and many state legislatures are trying to weed out the bad companies, but they haven’t been successful, yet.

The tax consequences of debt settlement

What? — I have to pay TAXES on settled debt? Yes.

The IRS, in Publication 908, says, “If a debt is canceled or forgiven, other than as a gift or bequest, the debtor generally must include the canceled debt in gross income for tax purposes.” OUCH! We’ll bet that the debt settlement company won’t tell you this!

So, if you settle a $10,000 debt for $5,000, you may owe income tax for $5,000 that you never even had in your pocket for one minute!

What happens if you discharge the debt in bankruptcy? Nothing. No tax consequences. The IRS lists cancellation of a debt in bankruptcy as an exclusion (exception) to the rule.

We’ll bet that the debt settlement company won’t tell you that.