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Bankruptcy vs. Debt Settlement Agreements

Posted by Rory Vohwinkel | Aug 16, 2018 | 0 Comments

You might have seen the late-night television commercials or heard the radio spots. These companies claim that they'll talk to your creditors, get you out of debt trouble and save you from bankruptcy so you can live happily ever after.

There are a lot of debt settlement firms making claims of that nature. But the truth is usually much different than the pitch. Personal bankruptcy, as painful as it might be as you go through it, has many advantages over debt settlement agreements. As a trusted and experienced Las Vegas bankruptcy attorney, here are some of my reasons for avoiding the firms that work out these arrangements.

Let's start with a brief introduction to the concept.

The Promise

Debt settlement firms present themselves as third-party professionals who will intercede with your creditors on your behalf. They'll negotiate new terms, so you can pay pennies on the dollars owed and stay out of bankruptcy court.

You'll stop communicating with your creditors and bill collectors. Instead, you'll submit your payments to the debt settlement firms and trust that they'll settle your bills for you.

Here's the downside.

They have no legal standing. Chapter 7 and chapter 13 bankruptcy actions have the full authority of the federal government behind them. Your debtors have little choice but to abide by the decisions of the court. On the other hand, debt settlement agreements carry no legal weight. Your creditors can ignore the phone calls and refuse to deal with the firms.

You'll pay a steep cost. Not only do debt settlement companies charge fees upfront to take on your case and set up your account. They also take a percentage of any debt they're able to cut. For instance, if your settlement firm was able to reduce by $4,000 what you owe on a personal line of credit, and charges you a 25 percent commission on the savings, the cost to you from that one transaction would be $1,000.

Your forgiven debt could be taxed. The cost of doing business with a debt settlement firm doesn't stop there. The IRS thinks of forgiven debt as income. In other words, if you owe $10,000 on your car, but a debt resettlement firm persuades your lender to forgive $5,000 of that debt, the government would define that as income and you could get a steep year-end tax bill for the gain.

Debt settlement won't stop the drama. Personal bankruptcy puts a halt to all of the harassing phone calls, lawsuit threats and repo and foreclosure proceedings. But since debt settlement firms have no legal basis, there's nothing to stop your creditors from taking action while the firm tries to work on your behalf. You could lose your home and car in the middle of negotiations.

Work With an Experienced Attorney

A more logical alternative to debt settlement agreements is to work with an attorney with significant loan modifications Las Vegas NV experience. I'll study your unique situation and help you come up with a response that will provide real and lasting financial relief. Contact Vohwinkel & Associates today.

About the Author

Rory Vohwinkel

Rory Vohwinkel began his legal career at one of Nevada's oldest and largest law firms, representing clients in commercial litigation and business transactions. Rory went on to serve as the sole in-house attorney for a national real estate investment and property management company. In 2009, Rory...

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