Bankruptcy v. Debt Relief Programs 03/26/2010
In my experience, many people attempt to pay off their surmounting debts by paying fees to a Debt Relief Program. My advice is to really evaluate these programs before biting that huge bullet. They usually cost more than bankruptcy, they claim to have special powers to negotiate the terms, and even if they are successful it will cost you more in taxes than it is worth.
Here are the facts: Bankruptcy can be limited in cost to between $1500 and $2500. Most Debt Relief Programs cost more than this in just fees. Why spend that much money just to have to pay off your bills, when you can spend less and eliminate your debt entirely?
Secondly, they do not have super powers to re-negotiate your credit contracts. They have no more power than you to do that, so you are only paying them to make phone calls you yourself can make. You may value your time, but probably not that much.
Furthermore, they take their fees off the top, waiting until you have paid them off before any of that monthly payment you send in goes to the credit card companies. Read that contract carefully. I have seen too many people come in after paying thousands of dollars to a Debt Relief program, only to have a lawsuit in their hands from one or more of the credit card companies. (They usually sign up for bankruptcy right away, just FYI).
Lastly, even if they are successful and they negotiate your balances down – instead of owing them $60,000, you now owe only $10,00 – the IRS recognizes that $50,000 as income. It is considered a gift from the creditors to you. You will receive a 1099-C in the mail, the IRS will know about it, and you will have to pay taxes on it.
Bankruptcy avoids all of this. All of your unsecured debts are wiped clean after bankruptcy – you owe no one. An attorney has all the power you need to get to this point, and all in one relatively affordable price. Lastly, the IRS doesn’t recognize the debt as income – that means no tax implications at all! You walk away from the bankruptcy having spent less money, less time, and saving more money than if you had gone through a Debt Relief program. I know where I’d place my future and income – bankruptcy, all the way.