DEBT CONSOLIDATION / DEBT SETTLEMENT
There are a number of companies out there who for a fee will attempt to negotiate with your creditors to settle your debts for a reduced amount.
I am not here to throw an entire industry under the bus but before you sign up for one of these programs there are a few things that you need to know.
In all fairness to those types of companies if their clients are happy they do not need to call an attorney that does debt defense and bankruptcy. That being said about a year ago I got an unrelated inquiry from a potential client who had utilized one of those services. It was the first and only time in twelve years I’ve heard such a thing. Contrast that with the call I’ve gotten 3 or 4 times over the years where some such type of company has taken someone’s money and skipped town.
The usual pattern that I hear is that the client had a large amount of debt and approached a debt settlement company. The consumer pays quite a bit of money in, then the company tries to negotiate with the various creditors. The majority of the creditors will work with them but there are always a few difficult creditors that either will not work with these companies or want so much that it’s not cost effective. Ultimately the consumer runs out of cash without being able to settle with the last few holdout creditors. In some cases lawsuits will be filed by the creditors in an attempt to collect the debt.
Anytime you are sued for debt (or any reason) you need to consult an attorney ASAP!
Before you solicit the services of a debt settlement company please take a look at Texas Finance Code Chapter 394 so you know some of the rules that they need to follow.
In addition you need to know that:
- Creditors are under no obligation to work with 3rd parties
- Creditors are under no obligation to reduce the amount of debt owed.
- Debt Settlement Companies will keep a large amount of your money for themselves
- Debt settlement companies may advise you to stop making payments. In some cases this is the only way that a creditor will work with you. In other cases going to default may accelerate the debt, damage what’s left of your credit report, and result in increased interest and fees.
- General Rule is that forgiven debt is taxable income. There is a possible way around this via insolvency but contact your CPA or tax professionals. If a creditor will accept $5,000.00 on a $10,000 debt they will generally issue a 1099 misc to the IRS for the other $5,000.00. Exemptions and other consumer protection statutes generally do not apply to the IRS. While a $5,000 reduction in your debt may sound attractive you may be trading one problem for another.
- Most funds that are in a qualified retirement program are exempt from creditors (or a bankruptcy trustee for that matter). Once they are taken out and are in a liquid checking account they are no longer exempt. Taking funds out of a retirement could potentially expose you to early withdrawal penalties not to mention tax consequences, in addition to the tax consequences for forgiven debt. You may just trade 1 set of creditors for the IRS instead. Bankruptcy will not offer much help with taxes.
Keep these in mind before hiring a debt settlement company, or attempting to do It yourself.
Call me for a free consultation 817 738 1633.