Is Debt Settlement Better than Bankruptcy in NY?

The current recession is causing financial hardship for many people. Many people in New York find themselves with no work, or with lower income and hours than they had before. Debt collectors and collection lawyers don’t stop trying to collect debts just because we are in a recession or someone has lost his or her job.

1. Misleading and Extensive Advertising by Debt Settlement Companies.

Many people fall victim to misleading advertising schemes of the so-called debt settlement companies (also known as debt negotiation). They run constant ads on TV and radio with very sympathetic, “common Joe and Jane” type characters who explain how they had financial problems until they call the debt settlement company running the ad. Often, to try to target particular ethnic or immigrant communities, the ads use the patois and words that someone hearing the add from that community would identify with (for example, the ads targeting the Caribbean community have speakers that a listener would identify with as someone from the Caribbean).

2. Failure to Identify that Creditor Participation in Debt Settlement is Voluntary..

The critical thing that the debt settlement companies fail to clearly and prominently disclosure upfront in their advertising and promotional materials is that that participation of creditors (such as banks and credit card companies) in a debt settlement program is entirely voluntary. If a bank or credit card company does not want to participate THERE IS ABSOLUTELY NOTHING THAT THE DEBT SETTLEMENT COMPANY CAN DO TO FORCE IT TO PARTICIPATE. This means that you might hire a debt settlement company and stop paying all of your creditors as they instruct you to do while they propose a debt settlement plan, and in the meantime you may get sued by one of your creditors. This is very common and we see it all the time. We believe this is misleading practice of the debt settlement industry that should be stopped.

Bankruptcy, on the other hand, is not a voluntary process. Bankruptcy is a mandatory process and unsecured creditors (such as they typical credit card debt) don’t get to ignore it and sue you if they want to. But they can in debt settlement
3. Failure to Identify Tax Consequences of Debt Settlement.

Another major shortcoming of debt settlement is that they fail to clearly and prominently disclose upfront in their advertising and promotional materials the negative income tax consequence of debt settlement. When you borrow money that is not income and that loan to you is not taxable because you are required to repay a loan. But, when your creditor writes off the loan in whole or in part, the amount written off is taxable to you as income. So whatever amount of debt that is written off will be counted as taxable income to you and taxed at your income tax rate. There are certain exceptions involving insolvent taxpayers, but those exceptions may only apply in limited circumstances.

In bankruptcy, by contrast, any debt that is discharged (wiped out) in bankruptcy is not taxable to the taxpayer.

While debt settlement may help some people, there are many people who clearly would be better off avoiding it altogether. For many of these people bankruptcy would be a better solution to their financial problems. We say this based on our personal experience over the years in dealing with our clients who come in in tears with frozen bank accounts, even though they have been in debt settlement for months and making large payments to debt settlement companies. Bankruptcy is not a panacea (cure all), but for many people with financial problems it is a good solution to their financial problems that should be seriously considered.

Please feel free to contact us at 888-867-8165 if you have any questions or would like to schedule a free initial consultation.