Nobody wants to file for bankruptcy, but when creditors become aggressive, all options must be considered. Every situation is different, but here are some things to consider:

Advantages of Debt Settlement:

Settlement of debts has the advantage of avoiding the stigma of bankruptcy. Furthermore, a properly-structured settlement can mitigate the damage to your credit, while substantially lowering the balance.

Many debts can be settled for pennies on the dollar. According to the “Collections and Credit Risk Newsletter”: One of the largest collectors, Midland Funding, has paid more than $2.1 billion to purchase about 40 million accounts with a face value of about $66.4 billion, or about three cents on the dollar, mostly from banks, credit card companies and cellphone companies that had written off the bad debts, the attorney general’s office said.

So, if collection agencies are acquiring the debt from the origianl creditor for as little as 3 cents on the dollar, you can certainly settle the debt at a substantial discount. One debt settlement company advertises an average settlement amount of only 19% of the original debt.

Drawbacks of Debt Settlement:

“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 –

Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:
1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.
2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts — even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.
3. Because debt settlement programs often ask — or encourage — you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.Beware of Debt Settlement Scams

Some companies offering debt settlement programs may engage in deception and fail to deliver on the promises they make — for example, promises or “guarantees” to settle all your credit card debts for, say, 30 to 60 percent of the amount you owe. Other companies may try to collect their own fees from you before they have settled any of your debts — a practice prohibited under the FTC’s Telemarketing Sales Rule (TSR) for companies engaged in telemarketing these services. Some fail to explain the risks associated with their programs: for example, that many (or most) consumers drop out without settling their debts, that consumers’ credit reports may suffer, or that debt collectors may continue to call you.Avoid doing business with any company that promises to settle your debt if the company:
•charges any fees before it settles your debts
•touts a “new government program” to bail out personal credit card debt
•guarantees it can make your unsecured debt go away
•tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
•tells you it can stop all debt collection calls and lawsuits
•guarantees that your unsecured debts can be paid off for pennies on the dollar

Researching Debt Settlement Companies
Before you enroll in a debt settlement program, do your homework. You’re making a big decision that involves spending a lot of your money — money that could go toward paying down your debt. Check out the company with your state Attorney General and local consumer protection agency. They can tell you if any consumer complaints are on file about the firm you’re considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.Enter the name of the company name with the word “complaints” into a search engine. Read what others have said about the companies you’re considering, including news about any lawsuits with state or federal regulators for engaging in deceptive or unfair practices.Fees

If you do business with a debt settlement company, you may have to put money in a dedicated bank account, which will be administered by an independent third party. The funds are yours and you are entitled to the interest that accrues. The account administrator may charge you a reasonable fee for account maintenance, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.A company can charge you only a portion of its full fee for each debt it settles. For example, say you owe money to five creditors. The company successfully negotiates a settlement with one of your creditors. The company can charge you only a portion of its full fee at this time because it still needs to successfully negotiate with four other creditors. Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you another portion of its full fee. If the company’s fees are based on a percentage of the amount you save through the settlement, it must tell you both the percentage it charges and the estimated dollar amount it represents. This may be called a “contingency” fee.Disclosure Requirements

Before you sign up for the service, the debt relief company must give you information about the program:
•The price and terms: The company must explain its fees and any conditions on its services.
•Results: The company must tell you how long it will take to get results — how many months or years before it will make an offer to each creditor for a settlement.
•Offers: The company must tell you how much money or the percentage of each outstanding debt you must save before it will make an offer to each creditor on your behalf.
•Non-payment: If the company asks you to stop making payments to your creditors — or if the program relies on you to not make payments — it must tell you about the possible negative consequences of your action, including damage to your credit report and credit score; that your creditors may sue you or continue with the collections process; and that your credit card companies may charge you additional fees and interest, which will increase the amount you owe.

The debt relief company also must tell you that:
•the funds are yours and you are entitled to the interest earned;
•the account administrator is not affiliated with the debt relief provider and doesn’t get referral fees; and
•you may withdraw your money any time without penalty

Tax Consequences
Depending on your financial condition, any savings you get from debt relief services can be considered income and taxable. Credit card companies and others may report settled debt to the IRS, which the IRS considers income, unless you are “insolvent.” Insolvency is when your total debts are more than the fair market value of your total assets. Insolvency can be complex to determine. Talk to a tax professional if are not sure whether you qualify for this exception.

Advantages of Bankruptcy:

Whether filing for Chapter 7 or Chapter 13 bankruptcy, certain advantages exist when compared with debt settlement:

■Filing for bankruptcy may stop debt collection activities such as wage garnishment and repossession of a car
■Filing for bankruptcy does not subject a consumer to a tax on forgiven debts
■Filing for bankruptcy offers a fresh start for those unable to repay their debts

Consumer bankruptcy cases are inexpensive. Chapter 13 cases, for example, are filed for a cost of $351. Chapter 7 cases usually cost between $1,000 and $1,600 – so that cost, compared to the amount of debt being eliminated, is usually minimal.

Bankruptcy can give you a fresh start, debt free. You can use your fresh start as a platform to rebuild your credit. We often see situations where our clients rebuild their credit faster AFTER bankruptcy, than they could have while participating in a drawn-out debt settlement program.

Drawbacks of Bankruptcy:

Bankruptcy isn’t the right fit for every case, and it does impact your credit. Some of our clients have too much income, or too many assets, to qualify for the best types of bankruptcy relief.


There’s absolutely no drawback in visiting our law firm for a free case evaluation. We have years of experience, and we can assess your best option with only 1 concern – your best interests. As you can see from our client testimonials, we have represented thousands of satisfied clients. We would be honored to help you accomplish a fresh financial start.

For a free consultation, call Brian R. Cahn & Associates, LLC today: (770) 382-8900.

Brian R. Cahn

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