I may get myself into trouble, but I’m going to assume that if you’re looking at our website, you’re trying to find a way to get out from under overwhelming debt. While bankruptcy is one way to do that, another way is to negotiate with your creditors to settle your debt for less than you owe, either directly or by using a debt settlement company. I thought it might be helpful to write about a couple of differences between the two methods that might help you make a decision. Two of the biggest areas of difference between bankruptcy and debt settlement are taxes and lawsuits.
Tax consequences – If you settle a debt with a creditor for less than you owe, there will likely be tax consequences. Let’s say that you Citibank $10,000.00, but they agree to let you settle your account for $5,000.00. You can rest assured that come tax time, Citibank will send you a 1099-C. This 1099-C will essentially be saying that you realized $5,000.00 in income as a result of debt forgiveness. The bottom line? You’ll be paying income taxes on that $5,000.00. When you file bankruptcy, there are no tax consequences for the debt you get rid of. Creditors won’t be sending you 1099s, and you’ll be that much closer to a fresh start. Keep in mind, however, that you should carefully time your bankruptcy filing to avoid the bankruptcy trustee asking for your tax refund.
Lawsuits – When you work with a debt settlement company, they promise to reduce how much you owe to your creditors. What they don’t mention is that in order to negotiate with your creditors, they need money. Before they can pay any of your creditors, you’ll have to build up an escrow account, which is essentially a savings account they’ll use to pay your creditors. What the debt settlement company may not mention is that while you are building up your escrow account, the creditors still want to be paid. That means they’ll probably move forward with suing you. Once they get judgment, they can have your paycheck garnished. Bankruptcy, on the other hand, will immediately stop any collection action by your creditors. They can’t call you or your boss. They can’t write you. Even more importantly, they can’t sue you or take any of your paycheck.
If you are considering bankruptcy, schedule a free consultation with a Denver bankruptcy attorney. You’ll be able to ask all the questions you have about bankruptcy and debt settlement and be able to make a more informed decision.