Debt forgiveness often comes at a price

On Behalf of | Jun 16, 2016 | Debt Relief |

Texas residents who are struggling to make ends meet sometimes pursue debt forgiveness or debt settlement because they are worried that their credit ratings will suffer and their assets will be seized if they file for bankruptcy. Many companies offer to help debtors to negotiate settlements with credit card companies and other lenders that they claim could save them hundreds or thousands of dollars, but they rarely mention that their clients may be left far worse off than they would have been had they filed for bankruptcy instead.

Credit card companies are rarely willing to negotiate a settlement with debtors who are paying their bills on time, and companies offering debt forgiveness services may encourage their clients to cease making payments in order to bring them to the negotiating table. This will usually have a negative impact on credit scores, and the damage will be made even worse when the credit card companies concerned report to the credit reporting agencies that the balances in question were settled for less than the full amount.

Higher tax bills are another hidden cost of debt forgiveness. The Internal Revenue Service considers most forgiven debt to be a form of income, and borrowers are required to disclose any cancelled debt on their personal income tax returns. Creditors generally send a form 1099-C to debtors and notify the IRS when balances are reduced or cancelled.

Experienced bankruptcy attorneys may explain the advantages and disadvantages of the various forms of debt relief and the hidden drawbacks that debt settlement companies may be reluctant to disclose. Attorneys could also clear up many of the myths surrounding bankruptcy and point out that the laws governing Chapter 7 and Chapter 13 filings were passed to provide individuals with unmanageable financial situations a chance for a fresh financial start and not to punish them.