In theory debt settlement is simple: the debtor negotiates with the creditor to reduce a debt to an amount that is regarded as payment in full. It sounds honest enough: the debtor cannot afford to repay a debt, so the creditor agrees to accept a reduction. The creditor is paid something and the debtor avoids bankruptcy.
In practice debt settlement is a nasty game of chicken. The debt settlement company advises the debtor to stop making monthly payments to the creditor. In response, the creditor pressures the debtor to pay through harassing telephone calls, damage to the debtor's credit report, mounting interest and fees, and perhaps legal action. The resolution comes when one side blinks: either the creditor is convinced that it better take a settlement or risk discharge in bankruptcy; or the debtor realizes that his or her credit is ruined and actually files bankruptcy.
Debt settlement is big business, but many debt settlement companies have caused big trouble for their clients. Take for example Debt Relief USA. This company, like many debt settlement companies, advised its customers to stop paying its creditors and instead deposit money into a Debt Relief USA settlement account. This money, held by Debt Relief USA, was to be used as settle funds for the individual's debts. Customers were assessed fees for services including burdensome "administration fees" and monthly "maintenance fees" that further damaged its customers' financial situations. When a debt was settled, the Debt Relief USA charged a 13 percent "negotiation fee."
In 2009 Debt Relief USA filed a Chapter 11 bankruptcy and claimed that it owed its clients $5 million from these settlement accounts. In December 2010, the bankruptcy court approved a $3.7 million disbursement to Debt Relief USA's clients. The case was also converted toChapter 7 and Debt Relief USA is no longer conducting business.
As a bankruptcy attorney, I regularly see the damage caused by debt settlement companies. In many cases, these companies, after taking large fees, are unable to provide any relief for their clients and the individual's credit is destroyed. In the cases where these companies are able to negotiate a settlement, the creditor may issue the debtor with an IRS Form 1099 for the amount of debt forgiven. This may trigger serious tax consequences for the individual. In any event, these companies do not appear to have a strong record of success. Before agreeing to any debt relief program, discuss your financial situation with an
experienced bankruptcy attorney. There are powerful federal laws that can protect you from overwhelming debt, and a bankruptcy attorney can
review your legal options without risking your cash.
Contact the experienced Chicago bankruptcy attorneys at Glanzer & Associates, P.C. at 1-312-644-2227 to discuss your specific situation, and to schedule your free, in-person consultation.