Archive for July, 2009

Anyone considering bankruptcy has seen the adds…”drastically reduce your credit card payments…don’t file bankruptcy, Call us first.” Many of these adds promise to reduce your credit card payments and freeze your interest rates.  However, the question is….do they work. In a previous post, I wrote about what a fraud debt consolidation companies are.; but what about debt management, or “debt negotiation”?  How do debt management companies rate to bankruptcy?

1. Guaranteed Success: Bankruptcy wins here. In debt settlement, your creditors do not have to participate in your debt negotiation program. However, in Bankruptcy your creditors don’t have an option. In a Chapter 7 bankruptcy your unsecured debts are discharged (they go away) and in a Chapter 13 Bankruptcy, the court sets up a repayment schedule that is based on your available monthly disposable income.

2. Credit report: this could go either way. Bankruptcy stays on your credit report for at least 10 years. However, most people who file bankruptcy have a better credit score within a year after filing. Debt settlement does not do much better.  Even if you repay your creditor, your participation in the program is reported to the credit reporting agencies;  not to mention that it will generally take longer to repay your debt.  If a creditor has already sued you, this will also stay on your credit report for 10 years.

3. Taxes: This is a big one. Did you know that if you settle your debts with your creditors for less than the full value that your creditor will issue you a 1099 for the amount that the creditor wrote off…and it is considered income for you. So assume that you owe a creditor $10,000 and settle the debt for $5,000. At the end of the year, the $4,000 that was written of, is considered income; so you have to pay taxes on that $4,000. The IRS considers this a forgiveness of debt and it is taxable income. This is not the case in Bankruptcy; once your debt is discharged, there is no tax consequence.

4. Finality: Consider this; most people who try to settle their debts through one of those debt settlement companies ends up filing bankruptcy anyway; usually after they have paid thousands of dollars in fees to the settlement company; only to never have it paid to their creditors. Even if you stick to the program, it could take as much as 3 years before some of your debts are settled. If you file bankruptcy; you receive your discharge within three months of filing (for a chapter 7).

Every situation is different; bankruptcy is not for everyone. As I have always said, if you are in a lot of debt and you are considering bankruptcy, the first step is to talk to a Massachusetts bankruptcy lawyer.