Debt Settlement Programs May Not Be The Answer To Your Financial Problems:
Every day I ride home from work, and while listening to the radio I hear the many and varied “Debt Settlement” program advertisements. Every day at work I meet with people who are seeing me with a need to file for Bankruptcy. An increasing number of the people I meet with, and who are now filing for Bankruptcy, have tried “Debt Settlement” programs. The typical story I hear about these companies is not impressive, and in most cases borders on what appears to be fraud. It reminds me of the old saying: “If it sounds to be good to be true, it is probably not true”. I am sure some of these companies are having their successes; however, I am not seeing any of their successes with the people I meet. Generally the story I hear, goes like this:
- The “Debt Settlement Agency” told me they could negotiate down all of my debts;
- They also set matters up for one payment to be taken directly from my bank account for distribution to my creditors; and
- Lastly, they told me everything was taken care of, so my payments are made over next several months without fail.
The story when they get to my office actually turns out to be:
- The payments to the Debt Settlement Agency were made just like clockwork;
- One or more of the creditors, who I was led to believe were being paid under the “Debt Settlement” program, have now filed a lawsuit against me; and
- I am about to lose some of my income to a Garnishment Order from a lawsuit I thought was being taken care of by the “Debt Settlement” company.
END RESULT: The end result for the people I have met with, and who were originally in a “Debt Settlement” program, is as follows:
- They end up filing for Bankruptcy;
- They end up losing the money they sent to the “Debt Settlement” program; and
- In some cases they ended up getting a notice from the IRS that they have underpaid their income taxes because they failed to report as “income” the amount of debt the “Debt Settlement Agency” got reduced. [The IRS treats "forgiven debt" as income for tax purposes, unless the debt is forgiven in a Bankruptcy]. If the “Debt Relief Agency” negotiated a reduced amount to be paid to your creditor, your creditor will then report the “forgiven” amount of the debt to the IRS as income under a 1099 Statement so you will be taxed on it. The Internal Revenue Code has a specific provision preventing the IRS from treating debt that is discharged in a Bankruptcy from being treated as “income” for tax purposes.
REMEMBER: “If it sounds to be good to be true, it is probably not true”.
Avoiding Cashing In and/or Borrowing Money From Retirement Funds:
Repayment of debt to a “favored” creditor, prior to the filing of a bankruptcy, can be attacked by the Trustee who is assigned by the Court to oversee your case. One of the jobs of the Trustee, who is assigned to your case, is to assure all of your creditors are treated fairly. The Bankruptcy Laws are written to prevent preferring one creditor over another in the repayment of debt, and such a payment can be labeled to be a “preference”. Repayment of debt to family members, and/or friends, within one year of the filing of a bankruptcy, can be attacked as a “preference”. If you make such a payment, the Trustee can pursue legal action against the family member or friend who received this preferential treatment, and make that person turn over the funds received in order that those funds can then be divided fairly to all of your creditors.
As a general rule all funds you have saved through any form of tax deferred retirement plans, 401Ks, IRAs, etc. are safe from creditor claims. As a result, they can be safely walked through a bankruptcy proceeding without losing any of those funds. In order to keep these funds safe, they must remain in a tax deferred status. If you cash them in, or borrow from them, the funds borrowed and/or cashed in are no longer safe from creditor claims. Those funds can then be taken by the Bankruptcy Trustee, who is assigned by the Court to oversee your case, for distribution to your creditors. If you find yourself in a position where you are looking to use these types of funds, in an attempt to get yourself out of debt, you should talk to a bankruptcy lawyer before doing so. It often takes years, if not a lifetime, to save those funds, and the cost of learning your bankruptcy rights is so minimal you should learn those rights before you cash them in for the payment of debts.
Avoid Lavish Use of Credit Cards Just Prior To Filing For Bankruptcy:
The bankruptcy laws are written in a fashion that will generally allow you, with certain exceptions, to eliminate almost all of your debt. These same laws are also written in a fashion that will not allow you to abuse your creditors. Once your finances have reached a point where you know you can not pay back debt you are incurring, or that you do not intend to pay back the debt you are incurring, further use of credit should be avoided. The perfect example of credit misuse is the person who has used almost the full limit on a credit card, has lost a job, and then decides a trip to Las Vegas would be a good idea since Bankruptcy is imminent. Use of credit in this situation will be attacked by the creditor, and the person who acted in this fashion will not likely be able to avoid being required to pay back this debt. There are less perfect examples; however, the main idea should be, if you realize your finances have reached a point where you need to file a bankruptcy, don’t run up the credit cards just because you can.
Avoid Taking Out 2nd Mortgages To Pay Off Credit Cards:
While times have recently changed in the banking industry, and obtaining 2nd mortgages may be more difficult, using 2nd mortgages to pay off credit cards is still generally a bad idea. Building equity in your home, much like saving for retirement, takes years and often a lifetime. The bankruptcy laws are written in such a fashion that will allow you to protect a fairly large amount of equity in your home, while still being allowed to rid yourself of significant credit card debt. If you use the equity in your home to pay off credit cards, the equity will be gone, the interest rates on the 2nd mortgage are likely to be high, and often times you end up filing for bankruptcy anyway. In many such cases, the existence of a 2nd mortgage may make it impossible to sell your home, especially if you owe more on the home than it can be sold for. If you are thinking of taking a 2nd mortgage on your residence in order to pay other debt, you should first consider that the cost of learning your Bankruptcy rights is so minimal you should learn those rights before you put your home, and the equity in your home, at risk.