The Federal Trade Commission has recently announced new rules that will prevent debt collection firms from charging customers up-front fees. The FTC’s new rules take effect October 27, 2010, and apply to telemarketing by for-profit debt settlement services, credit counseling services and debt negotiation companies. These for-profit companies may not charge customer fees until a debt is successfully renegotiated, settled, or reduced. The FTC rules do not apply to in-person or internet-only sales. Nonprofit credit counseling services are also not covered by the new rules.
Other new FTC rules set to take effect earlier, on September 27, 2010, forbid debt settlements from misrepresenting their services; require specific disclosures about costs and services; and mandate disclosures and fee protections available to customers who call in response to advertising. These new rules are the FTC’s response to thousands of consumer complaints to the Better Business Bureau and federal and state agencies.
While under certain circumstances debt settlement can be a viable alternative to bankruptcy, debt settlement only benefits a small percentage of borrowers. For most consumers, the remedy of debt settlement is worse than the illness of debt. Debt settlement generally boils down to outlasting the creditor to the point that the creditor believes that bankruptcy is inevitable. The creditor finally decides that some money is better than no money, but by that time the consumer has suffered serious harm.
The debt settlement process contains many dangers including significant damage to your credit report, increased balances from fees and interest, creditor harassment, and possible litigation. Many consumers are unaware that a settled debt is a taxable event. Any forgiven balance that exceeds $600 is taxable income. Debt settlement customers are often surprised by a bill from Uncle Sam after their debt is settled.
Bankruptcy is generally a better choice for families struggling with overwhelming debt. A bankruptcy can discharge your legal obligation to pay certain debts, or provide time to pay what you can afford through a court-supervised repayment plan. There is no creditor harassment, increased fees, or litigation. Any debt discharged in bankruptcy does not create a tax debt.
If you are struggling with debt, consult with an experienced bankruptcy attorney. The bankruptcy process offers many advantages over debt settlement and may be the remedy you need. Whatever path you choose to resolve your debt problem, get the facts and make a considered decision.