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”.