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Debt Settlement Settles Nothing

By Cathy Moran

The marketing success of  debt settlement companies flows from two profound truths about the indebted consumer:  they want to pay their bills and they were rebuffed by their creditors when they sought realistic terms.  It’s only too bad that marketing is the only thing that debt settlement companies are successful at.

Today’s New York Times story on debt settlement concluded that the industry “deepens the misery of debtors”. I think the whole concept of debt settlement is faulty and impractical.  But the industry doesn’t care so long as it gets its money off the top.

Debtors who genuinely want to repay their creditors should avail themselves of Chapter 13, where they can generally write the terms on which they repay creditors and have that plan enforced by a federal bankruptcy judge.  Plus, debts settled in bankruptcy generate no cancellation of debt income and therefore no tax hit.

Debt settlement outside of bankruptcy trashes the consumers credit record, so the illusion that debt settlement will preserve credit history is just that, an illusion.  The individual might just as well get real, effective and tax free relief from debts in bankruptcy.

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About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Trackbacks

  1. California Tax Treatment of Debt Discharged in Bankruptcy says:
    November 8, 2011 at 7:03 am

    […] of debt income is one of those gotcha’s that lurk, undiscussed, in debt settlement arrangements.? The tax system treats the forgiveness or cancellation of an obligation to be the same as if you […]

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About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

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