Bankruptcy v. Debt Settlement

One of the biggest scams out there is the “debt consolidation” or “debt settlement” business. Under a typical scenario, the debtor is asked to stop paying his/her credit card debt, or other debt, for a period of time. Naturally, this causes damage to one’s credit. Then, after some period of time has passed, during which the debtor is unable to obtain any new credit, the debtor is asked to pay between 35% and 60% of the total amount owing, including accumulated interest and late fees. So, if one had $15,000 in credit card debt, this would result in a “settlement” payment of between $5,250 and $9,000.

On top of that expense, the debtor would be required to pay the company who negotiated the deal about 15% of the original debt. In our example, this would equate to a fee of $2,250. As an additional kicker, the debtor will likely receive a 1099 from the credit provider who charged off a portion of the debt, thereby resulting in taxable income to the debtor. If the credit provider charged off $8,000, and assuming the debtor is in a 15% tax bracket, this could result in $1,200 of additional tax liability.

Let’s add up these figures. For a $15,000 original debt, the client will pay: (1) a settlement of $5,250 to $9,000; (2) professional fees of $2,250; and (3) extra taxes of $1,200, for a total of outlay of $8,700 to $12,450. All the while, causing serious damage to his/her credit.
By comparison, a Chapter 7 bankruptcy can usually be done for an amount not exceeding $2,500. A Chapter 7 bankruptcy is faster, less burdensome, does not require payments to creditors, does not result in any tax liability, and often does less damage to one’s credit!

For the vast majority of people, debt consolidation or debt settlement is a foolish idea when compared to bankruptcy. In our hypothetical, the debtor would have saved from $6,500 to $10,500 by filing bankruptcy. So, which makes more sense to you? Call us today for a free confidential consultation with Attorney David Speckman to explore whether bankruptcy make sense for your unique situation. We promise to give you straight and honest answers to all your questions.

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