For Wisconsin residents who are facing overwhelming debt and are unsure as to how they are going to get out from under them, debt settlement companies might seem like an alluring alternative to bankruptcy. These companies make claims that sound too good to be true. These assert an ability to negotiate debts and help desperate people whose finances are spiraling to receive debt relief. It is important to understand certain factors that go along with these companies and the reality of their claims.

Creditors are not obligated to deal with a debt settlement company. Often the debts are not all settled, if they are settled at all. These companies can be very expensive and leave the person in debt even if some of the unsecured debt is reduced. The strategy a debt settlement company often uses is to tell the debtor to stop making payments on credit cards. That will result in late fees, penalties and other costs. It will also lead the company to begin collection procedures. In the unlikely event that the debt settlement company can settle some or all of the debt, the fees that are owed as well as other costs will cancel out the benefit and remove any savings the debtor might have accrued. Credit scores are inevitably damaged by using these tactics.

If creditors do forgive a portion of a debt, there could be tax consequences as it might be viewed as taxable income when paying federal taxes. Certain companies should be looked at skeptically. If they charge fees before debts are settled; are promoting a government program for debtors; make guarantees that the debts will be cleared; inform the debtor to cease all contact with creditors; informs the person that the collection calls and legal filings can be stopped; or guarantees that unsecured debt will be paid, they should be called into question.

Bankruptcy might seem to be a worse option than trying to reduce the debt by dealing with a debt settlement company, but it is not. Bankruptcy is a viable and legal way for a debtor to discharge debt and get back onto stronger financial footing without having to worry about the reliability of a company that is making promises that are difficult to believe and achieve. Those who are thinking about debt settlement should speak to an attorney about the positives and negatives of debt relief through a settlement company in comparison to bankruptcy and then decide accordingly.

Source: consumerfinance.gov, “Should I use a debt settlement service to help me deal with my debt and debt collectors?,” accessed on March 7, 2017