As the economy continues to swirl around the top of the toilet bowl, in debt and unemployed Americans are searching for ways to avoid filing bankruptcy and still eliminate a mountain of debt. The credit industry has offered many ways to settle credit card debt by accepting a partial payment. This is basically what debt settlement companies negotiate with the creditor for the debtor. It's not really anything new or high-tech, although they don't want the debtor to know they could do it on their own because they would be out of business.
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What basically happens in a debt settlement if you do it on your own or through a company is the creditor will accept a lump sum of a lower amount than owed and charge off the debt. In most cases it's somewhere around a rate of 50% the balance owed. One problem with debt settlement is, where is someone going to get that amount of cash together when they're struggling to pay their monthly bills? This once again gives a bankruptcy filing extra stars for being a more cost effective way of eliminating debt.
What most debtors don't understand when they get sucked up in one of these debt elimination schemes is you still technically owe the charged off debt. This is how a creditor reports this to the credit reporting agency. It could even be a defaulted debt that also shows up as charged off even though nothing was ever negotiated. The problem arises with creditors who sell the charged off or defaulted debts to debt collection companies down the road maybe six months later. They don't know about, nor care about, the agreement the debtor made with the creditor. All they know is the debtor owes the money and they want to be paid. This is not always the case, as some creditors with integrity will instead make it a taxable event by sending the debtor at 1099C for the unpaid deficiency. Depending on the debtor situation this could end up causing the debtor to owe income taxes on the amount.
This is why filing bankruptcy is king. Filing Chapter 7 bankruptcy will eliminate all unsecured debts, medical bills, personal loans and payday loans. Any deficiencies owed from a foreclosure or repossessed car can be included in the bankruptcy filing and will be discharged at the end. Using the power of bankruptcy will protect the debtor from any future liability of the past debts. Not like a debt settlement program where they can come back and haunt you later, when filing Chapter 7 bankruptcy they are discharged in a court of law and the creditor can no longer come after the debtor. If a creditor decides to push the limits, the debtor can call their bankruptcy attorney to file a motion against the creditor for their behavior.
Depending on how egregious the behavior is the creditor could have sanctions put against them and possibly even have to pay damages. Having this immense power to protect the debtor with the help of a bankruptcy attorney allows the debtor that is buried under a mountain of debt to live again. Before a debtor gets sucked in to a debt consolidation program on a TV ad, they should take the time to visit a bankruptcy attorney and get an extra opinion on the debtor's financial situation.
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