Although there have been recent signs of recovery, it would be overly optimistic to say the ill effects of the recession are over. Many people across the nation are out of a job or underemployed in a job that does not fully cover living expenses. As a result, many Americans find themselves in desperate financial circumstances. In their desperation, many turn to debt settlement companies for help with their problems. Unfortunately in doing so, many can actually worsen their financial situation.
Debt settlement can be a financial trap
The number of debt settlement companies has exploded in recent years. Debt settlement companies are pro-profit institutions that attempt to negotiate with your creditors to reduce the amount you owe. For this service, they generally charge very high fees – some as high as 15 percent of the debt owed. Their commercials promise to settle your debts for a fraction of what is owed. What they don’t say in the commercials is that debt settlement fails for about two-thirds of those who try it, pushing many of them into the bankruptcy that they were trying to avoid. In addition, there is evidence of the financial danger that debt settlement companies pose to consumers. The Better Business Bureau has called debt settlement an “inherently problematic business.” Also, the Federal Trade Commission, the Government Accountability Office and attorneys general in 41 states have uncovered evidence of abuses by many such companies.
Some of the other shortcomings of the debt settlement process are:
• They will often charge you even if they did not successfully settle your debt.
• Unlike other debt relief processes, creditors do not have to work with debt settlement companies. If the settlement attempt was unsuccessful (or the creditors refuse to settle), you could have to pay interest or late fees, adding to you debt.
• if any debt is forgiven during the debt settlement process, it is taxable as income.
Bankruptcy can offer real relief
If you are overwhelmed by debt, bankruptcy is often a better option than debt settlement. Some of the advantages that bankruptcy has over debt settlement are:
• Bankruptcy costs much less than debt settlement companies.
• Any debt that is reduced or discharged through bankruptcy is not taxable.
• Bankruptcy can stop foreclosures, garnishments, car repossessions and collection phone calls, as creditors are legally required to work with you.
• Bankruptcy attorneys are required to act in your best interests.
Although bankruptcy is a powerful tool, it is not the right tool for everyone who is having financial difficulties. If you find yourself in this situation, consult an experienced bankruptcy attorney. An attorney can consider your individual situation and advise you whether bankruptcy is right for you and inform you of your debt relief options.