Debt-settlement companies and debt balances

On Behalf of | Jul 27, 2016 | Debt Relief |

Texans have several options when they are facing overwhelming levels of debt. Those choices may include getting help from a credit counseling agency, engaging in a personal budgeting plan, going through debt settlement companies or filing for consumer bankruptcy. It is important for consumers to understand that debt-settlement companies are not the same as credit counseling agencies.

Individuals who work with a debt-settlement company will set aside money in an escrow account and stop paying on their debts altogether. The company then tries to negotiate with the creditors in an attempt to get them to accept as little as 10 percent of the total amount owed. This means that people may be able to pay substantially less than what they owe on their debts. While this may sound great, there are some important points to understand.

Amounts that are charged off as bad debt by the creditors must be reported to the IRS. The IRS then counts these amounts as income, taxing the debtors on it. This means a person may end up with hefty tax bills. In most cases, taxes cannot be discharged through bankruptcy even though the debts that were charged off would otherwise have been dischargeable. People also may be sued by the creditors before agreements are reached, incurring court costs and possibly having their wages garnished.

People may want to consider bankruptcy to eliminate debt if they are facing unmanageable bills. When a person receives a discharge through bankruptcy, he or she will no longer be responsible for paying the debts that are discharged. In addition, the IRS does not tax a person on the discharged amounts. Bankruptcy also halts all further collection activity as soon as the petition is filed through an automatic stay.

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