by Tracy L. Hirsch, Attorney

Obviously, for most individuals, bankruptcy is a last resort. Although it is important to consider all options before deciding to file bankruptcy, it is equally important to understand the consequences of alternatives to bankruptcy. While debt consolidation companies can appear to be a viable alternative to bankruptcy, they are, for the most part, ineffective and have long lasting negative implications.

Many of these so called “debt consolidation” or “debt management” programs sound too good to be true. For the most part, these programs prey on individuals who are looking for any way out of their current financial despair. The problems with most of these programs is that they don’t deliver what they promise and leave the consumer in worse financial shape than they were before. Here are several reason why NOT to depend on a debt management or debt consolidation program to solve your credit card problems.

1. Hidden Fees-Many of these programs charge an up front fee of $500.00-$1,000.00 before they pay anything out to your creditors. They may initially send a letter to each credit card company notifying them of your enrollment status, but late fees, daily finance charges, and poor credit reporting will continue to haunt you. Until the up front fee is paid into your account, your creditors will likely not see a dime and can continue to call and harass you on a daily basis, or even sue you.

2. Legal Ramifications-Even if a debt settlement company does send monthly payments to your creditors, YOU ARE NOT PROTECTED! Unlike a bankruptcy, where there is an automatic stay in place which stops all collection activity, including calls, letters, lawsuits, wage garnishments and other forms of collection, creditors in a debt management plan can still come after you if they are not satisfied with the funds they are receiving. In other words, your creditors in a debt management plan have absolute veto power over the plan! They can simply disregard the plan and sue you, resulting in loss of up to 25% of your wages through garnishment. Imagine the frustration of paying thousand of dollars to a debt settlement company only to be sued and garnished by some of your creditors that you thought you were protected from.

3. Credit Reporting-One of the biggest myths about debt management plans is that by enrolling in one, you can “save your credit”. This is totally false. In most instances, debt management plans cause far more damage to your credit than does a bankruptcy filing. In fact, they are by their very nature designed to ruin your credit. For it is by driving your credit score into the ground that they are able to get the best deals with your creditors. A Chapter 7 bankruptcy filing erases most of your unsecured debt completely and allows you to rebuild your credit much more easily.

4. Tax Ramifications-What most individuals don’t realize until it is too late is that settling an account may actually cause you to owe taxes on the amount of debt that was written off. Any creditor that forgives a portion of the debt legitimately owed to it has the right to send you a 1099 form on the amount that was forgiven, which may be considered income that you have to pay taxes on at the end of the year. On the contrary, discharging your debts in bankruptcy never causes you to owe additional taxes.

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