When people first realize that they may be in financial trouble they either ignore the warning signs, or consider many options for fixing it.
A common thing is for people to panic and then attempt to work with a debt consolidation or debt settlement company.
This sounds like a good idea in theory, doesn’t it?
How do debt consolidation companies operate?
Here’s what you need to know about debt consolidation companies.
When you work with a debt consolidation company, you typically:
- Give them all of your bills
- Stop making payments on your bills
Then you make a single monthly payment to the debt consolidation company, and then they usually:
- Keep some of your payment as their fees
- Save the rest to eventually try and settle some of your debts
Once the money you deposit with the debt consolidation company has built up, the debt consolation company will then often:
- Approach your creditors
- Offer them far less than 100% of the amount you owe in order to forgive that debt
What does the creditor do?
The creditor can then choose whether or not to accept that offer.
After the first creditor accepts the offer, the consolidation company starts saving your money again to offer it to the next creditor, and so on.
This continues until all of your debts have been paid.
What’s wrong with that?
Perhaps you can see the problem already
- Your debts stop getting paid as soon as you start working with the debt consolidation company
This means your creditors might:
- Send your debts to collections, affecting your credit rating possibly resulting in judgments
- Decide not to settle for less than 100% of the debt
- Garnish your wages instead, and collect all of your debt that way
Understandably it can take many years of consolidation / settlement activity before all of your debts are resolved.
During this time:
- Your credit rating will suffer because your loans are not being paid
- You could be losing money from your wages too
- Some creditors may also be pursuing judgments
You can owe taxes
Perhaps more importantly:
- You can owe taxes on the debts that are forgiven when the consolidation company settles your debts for less than you owe.
If you settle a $10,000 debt by paying $5,000, then the IRS and the Minnesota Department of Revenue feel that you have just made $5,000 and should pay taxes on that $5,000 of income.
You will get a 1099-C form as evidence of this income if you settle any debts.
Why is filing for bankruptcy better than debt consolidation?
- Your creditors don’t have to agree to a settlement
- Your creditors have no say in whether your bankruptcy is successful
- Your creditors only get the assets can’t be protected (usually they get nothing)
- You are protected from judgments and garnishments for much of the bankruptcy process
- It is faster
- There are no taxes payable on the bankruptcy discharge
In addition, your credit score is likely to improve quicker too.
Your bankruptcy attorney will explain:
- What’s involved
- What debts will survive
- What the cost will be
This provides you with much more certainty than going through the debt settlement company.
Some Debt Consolidation companies scam consumers
You also have the assurance that your experienced Minnesota bankruptcy attorney is not pulling a scam.
Unfortunately debt consolidation and settlement companies often scam consumers, as per the FTC and Minnesota Attorney General’s warnings on this.
Bankruptcy attorneys, however, must follow strong ethical rules, and can lose their license to practice law if they give bad representation or cheat a client.
Debt consolidation companies do not have these ethical rules, and have a history of cheating good people out of money.
What to do next
W’ell see whether filing for bankruptcy is right for you.
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