Can I Really Settle My Debts for Pennies On the Dollar?

29 Jan Can I Really Settle My Debts for Pennies On the Dollar?

Pennies“Debt Settlement Companies” spend a whole lot of money on TV and radio ads. They also have a long history of problems. See the Federal Trade Commission website for some details.

Generally speaking, the longer most credit card companies go without being paid the more willing they (or, more typically, the debt buyers they sell your account to) are to cut deals for lump sum pay-offs for less than the balance.

Maybe you’ve seen the companies who promise to settle your debts for pennies on the dollar. They tell you to stop paying your credit card bills completely, and send money to them for a couple of years so that they can build up a lump sum to settle your debt with. Once they have enough money (over and above their enrollment fees, monthly maintenance fees, consultant fees, settlement fees, etc.), they claim that they’ll try to settle your debt for usually around 50 cents on the dollar. Sometimes it works but even if it does, there is still a lot of cleanup and expense to you.

The problems are:

  • You can do this yourself and save their usually exorbitant fees.
    Most companies charge, in addition to the start-up and maintenance fees, a percentage of the reduction in the amount.
  • The credit card companies usually refer your account to collection agencies, who call to harass you, send you nasty letters, and can sue you. You are advised to stop answering your phone or change to an unlisted number to avoid the often daily (or even hourly) nasty calls. You can’t stop the letters, short of moving, and can’t stop the lawsuits.
  • Your credit score is severely damaged for 7 years, due to the charge-offs on your credit record and the reporting of the account as “compromised”.
  • You will have to pay taxes on the reduction in debt. The IRS considers this “income” to you, and the credit card companies normally file a 1099-C for the amount of the reduction. So, if you settle your $10,000 credit card bill for $6,000, you’ll have to pay taxes on the $4,000 you save.
  • You will usually pay a whole lot more–often tens of thousands of dollars more–to settle your debts in this fashion than dealing with them in a Chapter 7 or Chapter 13.
  • By the time you finally get the settlement company enough money to actually work something out, the daily or monthly accrual of interest, late fees, overlimit fees, collection costs and attorney’s fees have significantly increased the balance due. Half of what you end up actually settling for might be all of what was owed when you started.

If you’re even considering doing something like this, add up all of the fees, costs, and taxes before you sign anything, and see if doing this makes sense financially. Often the small net savings are outweighed by tax liability and the stress of dealing with collection agency calls, letters, and lawsuits for an extended period of time.

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Brett Weiss, a senior partner at The Weiss Law Group, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his colleague, Daniel Press, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the previous Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute and the Bankruptcy Bar Association of Maryland. He has received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, the United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.
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