Why debt settlement might not be a good option
Florida residents who are facing overwhelming levels of debt may think that debt settlement might be a good option. Debt-settlement companies try to negotiate settlements for their clients to pay substantially smaller amounts in exchange for their creditors forgiving the balance. There are several reasons why this might not be a good option, however.
People who decide to use a debt-settlement company be asked to stop paying anything to their creditors. Instead, they will deposit money into an escrow account. When the balance grows to a sufficient level, the debt-settlement company will then make the creditors offers to settle their defaulted balances for somewhere from 10 to 50 percent of the amounts owed. If they agree, the remainders are forgiven.
People may not be aware that the IRS considers forgiven debt to be a type of income. This may leave them person facing high tax bills. In general, taxes cannot be discharged through bankruptcy even if the underlying debts could have been.
A person who does not meet the means test for income under Chapter 7 bankruptcy may want to consider filing for Chapter 13 bankruptcy instead of retaining a debt-settlement company. Under Chapter 13 bankruptcy, the person enters a repayment plan lasting between three to five years. At the end of the plan, most remaining unsecured debt balances are discharged, meaning the debtor no longer has an obligation to repay them. The IRS does not tax people on debt amounts that are discharged in bankruptcy. Filing bankruptcy may also help by stopping lawsuits and garnishments, something that debt settlement may not do since creditors do not have to accept offers of settlement made by debtors.