The Pitfalls of Working with Debt Settlement Companies | Article

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Home 9 Articles 9 The pitfalls of working with debt settlement companies

The pitfalls of working with debt settlement companies


Working with debt settlement companies rarely works and is guaranteed to be expensive.

If you find yourself behind on your debts, you are probably in a tense and desperate situation. When faced with such a situation, many people will do anything to get themselves out of it. However, it is important to be careful to not let your desperation for a way out to cause you to take steps that would lead to a worse situation. One of the potential ways for those owing debts to do exactly this is to work with debt settlement companies.

You may already be familiar with debt settlement companies that advertise on television. Their promises of settling your debt for a fraction of what is owed may seem alluring. However, in reality debt settlement companies have a very low success rate-as low as 10 percent according to the Federal Trade Commission. The reason for the low success rate: the ineffective tactics these companies use.

One tactic in particular that virtually all debt settlement companies use is to advise their clients to stop paying their bills while the company “negotiates” with creditors. Debt settlement companies tell their clients by doing so, they are using nonpayment of bills as leverage to convince creditors to accept a percentage of what is owed. However, this questionable tactic rarely works and makes the client’s situation worse in most cases.

Since the law does not require creditors to work with debt settlement companies, clients that follow this advice are almost guaranteed to be hit with late fees and interest once they stop payment on their bills. As a result, their outstanding balances continue to grow significantly. Additionally, nonpayment may simply goad creditors into garnishing the client’s wages or adopting other collection tactics.

Debt settlement clients can find themselves in a more difficult situation even in the rare cases where the debt settlement company is successful. In such cases, if the creditor agrees to accept less than the full amount of the debt as payment in full, the amount that is forgiven is considered income under the tax code. As a result, clients can face an unexpectedly large tax bill.

Consider a solution that works

In most cases, debt settlement companies do little or nothing to help clients with their debt problems while charging them high fees to do so. Many companies charge their clients 15 percent of the amount of debt owed or higher, regardless of whether they ultimately are successful.

Since the only guarantee that you would likely get out of debt settlement companies is a high bill for services, if you are struggling with debt, you might want to consider filing bankruptcy. Unlike debt settlement tactics, bankruptcy is a process that, if done right, can reduce or wipe away most of your debts without any adverse tax consequences. Also, the fee to file bankruptcy is quite low compared with hiring a debt settlement company.

Furthermore, debt settlement with the right firm can make all the difference. Here at Miller & Miller we do know that bankruptcy is not right for everyone, and therefore we do have our own version of debt negotiation/settlement that avoids the pitfalls mentioned in this article. The important thing is to have a proper evaluation first by an attorney who can do BOTH bankruptcy and debt settlement, so that you know the plan you choose is going to work exactly as anticipated.

To learn more about the benefits of bankruptcy and other debt relief options, contact the experienced bankruptcy attorneys at Miller & Miller Law, LLC. Our attorneys will help you explore all your options and recommend one that would be best, given your unique circumstances.