When someone is struggling with high credit card debt, it can be easy to take any offer that promises to eliminate that debt. This is why so many debt settlement companies exist. These companies are often referred to as “debt relief” or “debt adjusting” companies, and their claim is they can negotiate directly with the consumer’s creditors to reduce the amount he or she owes. However, when it comes to dealing with high credit card debt, working with a debt settlement company is not always the best plan.
During the debt settlement process, the consumer will stop making payments on his or her credit card debt in hopes that his or her creditors will settle for less than what is owed and will negotiate with the debt settlement company. The problem is, creditors are not bound to work with the debt settlement company, and this process can often take years to complete.
During this time, the damage done to the consumer’s credit score by not making any payments on his or her credit cards is significant. It can also lead to creditors filing a lawsuit against the consumer, if the credit card company decides to pursue collections on the debt instead of negotiations on the amount owed.
Additionally, one thing many consumers do not plan for you is the tax consequences that come along with forgiven debt. Any amount that is forgiven in the process is considered taxable income to the consumer. Additionally, to start the entire process, the consumer will normally be required to pay fees directly to the debt settlement company hired to handle negotiations. Both the fees and the tax consequences can seriously offset any savings that would otherwise be achieved in debt forgiveness.
Ultimately, the better option for consumers facing high credit card debt is to work with a non-profit credit counseling service or proceed with a bankruptcy case.
Bankruptcy allows the consumer to legally erase the credit card debt without triggering a tax consequence. The consumer also can take advantage of the automatic stay in putting an immediate halt to all collection actions being pursued against him or her. A Chapter 7 bankruptcy only takes just a few months to complete, while a Chapter 13 bankruptcy, which works a lot like a debt management program but through the formal bankruptcy system, can take anywhere from three to five years to complete.
While bankruptcy cases do lead to a drop in a person’s credit score, the impact felt by a bankruptcy case is much less harsh than the impact felt by defaulting on one’s accounts by working with a debt settlement company. Additionally, the bankruptcy case gives a consumer a fresh financial start and a clean slate once the bankruptcy discharge is issued, something which is not achieved by working with a debt settlement company.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
