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Thursday, July 22, 2010

Debt settlement vs Bankruptcy

I must have some spare time on my hands....been reading a few articles in various newspapers. A timely issue is that of debt settlement companies and are they really providing a bonafide benefit/service for a reasonable fee. Frankly....not so much. Let's face it...the economy is in the tank...people are in financial turmoil/stress...perfect environment for the vultures to come out to take advantage.

The debt settlement industry has gotten HUGE....everywhere you turn in print, TV, internet, radio....you name it...someone is hawking a debt settlement or debt "management" program. I actually had a guy connect with me a couple of months ago...personal referral from a lawyer I've done business with. He sent me an email saying that I could make "Tens of thousands of dollars a month for only an hour a day of my time"----I sent him an email back saying it sounded a hell of a lot like a late night television infomercial for flipping houses with a real estate scheme used to before the housing market blew up. He apparently was insulted....cried foul to the guy that referred him to me and that lawyer says he won't refer me bankruptcy cases anymore. Tell you what...if the price of doing business with that guy is acting in concert with his "buddy" to defraud and victimize people like my clients I don't want anything to do with him anyway. My sense was he was going to get a piece of whatever potential business was generated by the referral and he didn't like the fact that I turned his pal down.

Back the the article. Says the the Better Business Bureau of Minnesota and North Dakota is warning people about misleading debt settlement companies that claim to have a program that can easily either eliminate or reduce credit card debt. Since the recession started...which would be what...late 07' I guess...over 3,500 hundred complaints. 3,500...that's a big number and that is just in 2 states. Plus quite a number of state's attorney generals offices (including Minnesota's) have gone after numerous places like Credit Solutions, Debt Rx USA, Financial Freedom of America, Debt Settlement America, Clear Your Debt and Swift Rock Financial Solutions (never heard of that last one).

Most complaints to the Better Business Bureau allege that instead of having the debt settled as promised the debtors were often sued by their creditors and driven deeper in debt all the while thinking that whatever company they had hired where going to be "fixing" everything for them. Some of them ended up having their wages garnished.... WHILE they were in a program of debt settlement.

First off....it is never an easy or a quick process that comes without any pain. Don't care how they advertise it...it just ain't so. Plus...there is the significant impact on the debtor's credit score. The creditors don't always stop reporting late payments/missed payments to the credit bureaus...hardly...I think they usually do...debt management program or not. Plus, one thing that I've notice in my practice. They never tell people that if they settle a debt for less than what was owed that the debtor will be issued a 1099 at the end of the year. So guess what? It is an income earning event as far as the IRS is concerned and you have to pay taxes on that "income" at your regular tax rate. Why do they rarely tell people about this? Because 99% of the people looking into it would decide there is a small benefit to be had if they also have to pay taxes on any forgiven debt. Conveniently not part of the conversation I guess.

Frankly....I'm a bankruptcy attorney. If you've been reading my posts you know this already. Do I have any faith in debt management/settlement programs. Not much really. I read an article a number of years ago. The IRS had investigated something over 40 of these companies and decided to revoke the non-profit status of a number of them. How many? If you guessed ALL OF THEM---you'd be correct. Interesting eh? I think that sums it up right there. Considering the hit you take on your credit, the exposure to lawsuits, wage garnishments and bank account levy's (levys they can do w/o warning by the way...nothing like getting a notice from your bank telling you that a creditor cleaned out your account and now your checks are bouncing all over town) I'd suggest that bankruptcy....once you've gotten to that point makes a hell of a lot more sense. It's faster. It's cheaper. It protects you from lawsuits, levys and garnishments and discharges the debt giving you the relief you need to get a "fresh start" envisioned by the bankruptcy code and lets you move on with your life and start rebuilding your credit not weighted down by all that old debt. Honestly...by the time people come to me it is one of two things. Either their credit is bad...or it's real good but it's going to be really bad real soon. So---the things that have an adverse effect on your credit have already been set in motion long ago. I mention all of this because people often ask me how badly a bankruptcy filing is going to "hurt" their credit. Honestly it generally helps a heck of a lot more than it hurts. It's not the black kiss of death and it doesn't mean you'll never get credit again. It is scored as another event of your credit report and given a certain "weight"....just like a missed payment or something would be treated similarly. The real "penalty" for filing is that the cost of money goes up...probably for a year or two. Which means you'll pay higher interest for awhile. Most people...or a lot of them anyway are in that boat when they come to see me regardless. The difference is that the bankruptcy filing is a watershed event. Once it is filed you're no longer taking steps backward...you're actually going forward. Lots of variables work into a credit score. Longevity and stability of employment, income levels, current debt loads, regular payments, etc. Over the course of time the credit score generally goes up and as more time passes the bankruptcy filing itself isn't such a significant item....creditors you are wooing to give you a loan are more interested in how you are doing now, what kind of debt load you're carrying relative to your income and whether or not you've got some disposable income available to service new debt.

If you've got questions about bankruptcy we've got answers. Give me a call at 9952) 432-4388 or visit us at http://www.kingsburylawoffice.com/.

Dave Kingsbury
Bankruptcy Lawyer/Attorney

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