The theory behind debt settlement in Illinois is fairly simple: Your creditors will get more of their money from you if you don’t file bankruptcy. Under the threat of a bankruptcy filing, creditors may negotiate the terms of unsecured loans and credit cards. Some consumers are motivated to turn to debt settlement by the lure of reducing their debt by as much as 70 percent. The reality of debt settlement; however, exposes a number of critical flaws that nearly always make bankruptcy the preferred option for consumers in financial trouble.
How Debt Settlement Works
Negotiate With Creditors
There are many companies online that offer debt settlement services for consumers. The goal is to lower the interest rate or get a reduction in the current balance. Not all creditors will agree to change the terms of a credit card or loan agreement. Companies offering the service will often charge a fee that’s based on a percentage of any reduction in overall amount of money owed.
Before 2010, it was common for debt settlement companies to charge a fee in advance for their services. However, a rule issued that year by the Federal Trade Commission ended the practice.
Your Credit Card Will Be Frozen
Once a debt settlement agreement is in effect, your credit card is frozen until it is paid off. At that time, the credit card is retired. If you had an unsecured loan, it is virtually impossible to get another, similar loan with that company.
Issues Surrounding Debt Settlement
It’s important to understand some of the issues of debt settlement that are not widely publicized, as well as the comparison between debt settlement and bankruptcy. If you are considering debt settlement as a way to solve a financial crisis and avoid bankruptcy, make sure you first talk to a bankruptcy attorney for expert advice.
Debt Settlement Hurts Your Credit
Some consumers are motivated to avoid a bankruptcy at all costs. It is true that a bankruptcy can stay on your credit report for 10 years. But a consumer who is turning to debt settlement is already in a perilous financial situation. It’s likely that a consumer credit scores have already been affected. If not, debt settlement will lower a credit score nearly as much as bankruptcy. A knowledgeable bankruptcy attorney can explain the nearly identical credit impact of bankruptcy and debt settlement.
Let’s say several credit card companies agree to reduce $15,000 of debt. That money must be reported as income on your tax return, which will lead to a significantly higher tax bill that you probably can’t afford because of the precarious financial situation that caused you to turn to debt settlement in the first place.
The debt settlement industry has a checkered history that includes hundreds of enforcement actions for deceptive advertising by the FTC. In February 2011, the FTC discussed the dangers of debt settlement on its website: “It can be very risky, and have a long term negative impact on your credit report and, in turn your ability to get credit.”
Bankruptcy Can Be Quicker & Easier
If a creditor agrees to a debt settlement offer, it usually takes the consumer a number of years to pay off a loan or credit card balance. A Chapter 7 bankruptcy, on the other hand, can be completed in as little as four to six months. With the help of a bankruptcy attorney, a Chapter 7 filing often requires no more than a single trip to the courthouse, and none of the debt that is discharged has to be reported as income.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.