Idaho residents struggling with excessive financial obligations might look for solutions, and advertisements for debt settlement offers may seem appealing.
Debt settlement and potential problems
Debt settlement refers to a negotiated strategy to pay a portion of the debt to avoid default. If someone owes $10,000 in credit card debt and cannot pay, the debtor could negotiate directly or hire a third party to negotiate a settlement of $5,000. The credit card company might find receiving $5,000 preferable to suing someone who defaulted or seeing more than $5,000 discharged in bankruptcy.
The debtor might not realize the potential problem of debt settlement. For one, in many cases the forgiven portion of the debt is taxable, and a 1099 is filed with the IRS. Furthermore, debt settlements affect credit scores negatively. So, someone who settles with a debtor might see their credit ruined for years.
In some circumstances, filing for bankruptcy might be the appropriate path to take. Bankruptcy laws come with rules and protections that could make dealing with excessive debts less troubling.
A fresh start through bankruptcy
When someone files for bankruptcy, collection actions stop. So, someone who owes four credit card companies finds that the bankruptcy courts stay collection across the board. That would not be the case with debt settlements. Also, there is no tax burden for the discharged debt.
Yes, bankruptcy does impact credit scores, but there are potential benefits to filing and completing a bankruptcy. The established process allows for a fresh start after the organized and legal concludes.
Misconceptions about bankruptcy laws might lead some to not file. For example, a debtor might worry about liquidation, not realizing some assets receive exemptions. It might be worthwhile to research bankruptcy rules to reduce possible confusion.