HOW DEBT SETTLEMENTS WORK
Most debt settlement agencies operate by making the client send in monthly payments to the settlement company which are are held in an account. The account continues to grow--without any payments being made to your creditors. Once the debt settlement agency reaches an agreement with one of your creditors, they pay out the funds in the account to that particular creditor and the process starts all over again. The process of settling a debt with just one creditor can take several months to years. During this time, your other creditors get nothing and continue to harass you. Furthermore, your accounts are still being reported as "delinquent".
CONSEQUENCES OF DEBT SETTLEMENT
NO GUARANTEE OF SUCCESS: Your creditors do not have to agree to debt settlements nor do they even have speak with these companies. Creditor participation is voluntary. Even if the debt settlement agency is able to settle one of your debts, you are likely to still be left with thousands of debt from the creditors that have refused to negotiate.
PENALTIES AND INTEREST CONTINUE TO ACCRUE: Debt settlements can take a very long time. During this process, penalties, interest, and late fees continue to accrue on your accounts.
NO LEGAL PROTECTION: During your debt settlement program, there is no legal protection that prevents you from being sued or having your wages garnished by any of your creditors. Furthermore, debt settlement companies cannot stop a foreclosure, repossession or wage garnishment.
HIGH TAX CONSEQUENCES: The IRS generally regards debt settlements or "cancelled debt" as Income. Therefore, you will be liable to repay the forgiven debt on your income taxes.
HOW BANKRUPTCY IS DIFFERENT
BANKRUPTCY IS LEGALLY BINDING: Your creditors do not get to decide whether or not their debts will be discharged. You control the process.
YOU ARE LEGALLY PROTECTED: The "automatic stay" prevents creditors from taking any legal action against upon the filing of your Bankruptcy case. It also prohibits any further attempts to collect a debt. Bankruptcy can immediately stop a foreclosure, repossession, or wage garnishment.
NO PENALTIES OR INTEREST: In a Chapter 7 Bankruptcy, generally all unsecured debt (including interest, penalties and late fees) is wiped away in about 4 months. In Chapter 13 Bankruptcy minimal payments are made on unsecured debt, typically at 0% interest. There are no penalties or late fees that accrue.
NO TAX CONSEQUENCES: Debts discharged in Bankruptcy are not treated as Income for tax purposes.