I regularly have clients that consult with me for bankruptcy after they have hired a debt negotiation company or debt consolidation company. They are usually consulting with me because they are unhappy with the company they hired, and are many times, being sued by their creditors, even though they thought their debts were being handled. Most of the regret I see from my clients relating to bankruptcy is them wishing that they chose the bankruptcy option first rather than wasting their time, money, and sanity dealing with a debt negation company or debt consolidation company.
I, Michael Cleaveland, worked as an attorney for a firm for 10 years representing creditors. I have first hand knowledge of how creditors view these companies. I now only represent consumers, but I took with me a wealth of knowledge from working for the creditors. Below are some important things that any person should know before choosing to hire a debt negotiation company or debt consolidation company:
- You don’t have a “right” to settle your debts for pennies on the dollar (as I have seen advertised on TV). The creditor may choose to accept less than what you owe, but it is completely at their discretion.
- You may be subject to a 1099(c) if you settle your debts. This basically means the portion that was forgiven may count as income to you and you may have to pay taxes on it. There are no 1099(c) tax consequences such as this by filing bankruptcy.
- If you hire a debt negotiation company or debt consolidation company, you are not legally protected. If the debts are delinquent, they can still bring lawsuit against you. Your creditors can simply ignore any offers made from these companies. If you file bankruptcy, you will be legally protected from your creditors.
- Debt negotiation companies or debt consolidation companies typically have you pay a monthly amount to them, in which they save in an account. After they take their fees, they try to negotiate settlements. However, since it usually will take many months, if not years, to save enough money to settle your debts, many consumers find themselves facing lawsuits, judgments, or even garnishment, before they are able to settle.
- Bankruptcy is typically a cheaper option. Many of these companies charge consumers thousands of dollars in fees and do not resolve all of their debt issues. Bankruptcy is usually much less expensive and will legally give you a fresh start.
- Bankruptcy may be better for your credit score than negotiating your debts. In a typical Chapter 7 bankruptcy, you get a discharge of your debts about 3-4 months after you file your case. If my clients use credit responsibly after their discharge, they typically have over a 700 credit score within 2 years after their discharge.
There are many other advantages that bankruptcy offers that debt negotiation or debt consolidation does not. I strongly recommend that prior to making any decision, you speak to a knowledgeable bankruptcy attorney to discuss all the pros and cons based on your individual situation. Cleaveland & Cleaveland, P.L., a law firm located in Jacksonville, Florida, offers a free consultation to discuss your options relating to bankruptcy.