The Truth About Debt Settlement / Debt Management

Unfortunately, I see too many people taken for a ride by private debt settlement firms. By the time I see the client, they have usually wasted thousands of dollars, are still receiving 20 phone calls per day from debt collectors and have been sued. What are the problems?

1. Private debt settlement firms make no determination if the program is right for the person's circumstance, so long as they can get your money, they will put you in the program.

2. These firms play on the misconceptions and fear of other options, e.g. bankruptcy (Interesting side note, Debt Relief USA recently filed for chapter 11 bankruptcy).

3. The programs simply don't work for most people and are unrealistic.

Why?

These firms put people on 2-4 year monthly payments to accumulate funds to make lump sum offers to the client's creditors sometime in the future. The problem, during this time you will not be paying your creditors. In addition, because these firms are not attorneys, they have no legal basis to stop collection calls and cannot defend you if a lawsuit is filed. If a client cannot accumulate settlement funds in 12 months or less, the person is simply not a debt settlement candidate. For most people, the collection activity becomes unbearable and a collection agency will usually pop-up and sue the client during that 2-4 year time frame. All the while, the debt settlement firm is collecting a fee, doing nothing, and waiting for you to drop out of the program.

Other issues, debt settlement devastating to your credit. As you can see from above, you are making no payments to creditors; imagine having 24 months of missed payments on 10 different accounts on your credit report; then add in charge offs on those 10 accounts (banks and credit card lenders are required to charge-off an account after 6 months not payment), then add in who knows how many collection agencies popping on to your credit report. These claims that debt settlement can be done with no impact on your credit are absolutely false.

Finally, the kicker. The IRS treats forgiven debt (the difference between what you owe and what you pay to settle) as taxable income. Granted, there are some exceptions to paying income tax on forgiven debt (see IRS Form 982), but they are few and far between. In addition, sometimes the collection agencies simply sell the difference to some other junk debt buyer to collect, leaving you the burden to convince a low-life, bottom-feeding debt collector that you have previously settled the debt.

In my view, Debt Settlement is the true "last resort" to resolving debt. It's expensive and devastates your credit. Let me ask you this, if you have $100,000 in credit card debt, and you have $45,000 to settle it; is settling that debt "really the best use" of that money. Hell NO. Do yourself a favor, visit an attorney and explore ALL your options.