How Debt Settlement Can Lead to Even More Debt

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By: Bill Henry
PublishedMay 14, 2020
1 minute read

Many people each year choose to work with a debt settlement company to try to get out from under mounting debt. What many people don’t know is debt settlement can lead to more debt.

Bankruptcy attorney Jen Koss discusses how this can happen in her short video below.

The full transcript of Jen’s video is available for your convenience.

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Debt Settlement Can Lead to More Debt

You’ll often see ads for an alternative to bankruptcy called debt settlement. At first glance, debt settlement might seem like a favorable option.

It appears that you simply pay a debt settlement company and they in turn pay your creditors, however, there are both credit score and tax implications to participating in debt settlement. Understanding how a debt settlement company operates is important.

What Happens in a Debt Settlement

You would usually pay the debt settlement company reduced monthly payments and the company would then advise you to stop paying your creditors.

However, they won’t start paying your creditors until your account with them reaches a certain balance. This means that until that balance is reached with the debt settlement company, your creditors are gonna remain unpaid.

Your Credit Score & Other Possible Problems

This is going to have quick implications on your credit score. Depending on how long it takes you to reach that required balance, your credit score could take a serious hit.

It’s also important to understand that no debt settlement company can guarantee that all of your creditors are going to agree to a settled reduced amount.

Lawsuits & Tax Issues

Creditors can also sue you for any amount not included in that debt settlement agreement, which could then lead to wage and bank account garnishments.

Additionally, it’s important to understand the tax implications here. Creditors will send you a form 1099-C, which reports your canceled debts to the IRS.

Even if you don’t get a form 1099-C from all of your creditors, you must include this information in your tax return, therefore, if you move forward with debt settlement, you could find yourself with an even lower credit score and tax debt.

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