San Francisco Debt Settlement Attorney – FAQ

Debt Settlement FAQ

What is debt settlement?

Debt settlement is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. Debt settlement may be an alternative to bankruptcy if you have some money, but just not enough to entirely pay all your creditors.  Since the creditors recognize the fact that in many instances we can file a bankruptcy and eliminate their debt altogether, they may pay more attention with the threat of bankruptcy as an option.

Who should consider debt settlement?

This requires a careful analysis of your debts, income, expenses, and other relevant financial information. We’ll look at all options for dealing with your debts. It could that bankruptcy is the right path, debt settlement is the superior option or sometimes even doing nothing is appropriate.

Who can negotiate the debt settlement?

Consumers can arrange their own settlements by using advice found on websites, hire a lawyer to act for them, or use debt settlement companies. Some settlement companies may charge a large fee up front (often called “good faith” money); or take a monthly fee from customer bank accounts for their service, possibly reducing the incentive to settle with creditors quickly. Before deciding to hire a debt settlement company, be sure to check out the company with the Federal Trade Commission and the Attorney General’s Office of your State.  We strongly caution the use of debt settlement companies because in our experience our clients often never have their debts settled.

How does debt settlement work?

Essentially, you, your attorney, or a debt settlement company negotiates upon the borrowers’ behalf with creditors to reduce the overall debts in exchange for an agreement upon regular payments or a lump sum settlement.

What are the advantages of debt settlement?

For the debtor, debt settlement can sometimes make sense where the debtor does not qualify for a Chapter 7 bankruptcy and under Chapter 13 bankruptcy , the debtor would be required to pay back most of the unsecured debts anyway. The debtor can sometimes reduce his or her debt balances by more than 50%. Whereas, for the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file bankruptcy (in which case, the creditor risks losing all monies owed).

What are the fees involved with a Debt Settlement program?

It depends on the number of cards you have, and the amount of your debt. We will quote you either a flat fee or hourly rate as is appropriate to your circumstances for negotiating your debt. Please note that the fee does not include any cost of litigation should the creditor sue you.

What are the disadvantages of debt settlement?

Unlike bankruptcy, there is no guarantee that the creditors will agree to a settlement. There is no “formula” to debt settlement as there is to bankruptcy. It can be a long, often tedious process to negotiate with every credit card company. Each creditor has their own debt settlement method, and many tend to have an aggressive resistance against negotiations. There is also no bankruptcy protection that stays any collection efforts by the creditor. There’s always the possibility of lawsuit whenever debts lay unpaid.

In Chapter 7 bankruptcy, you owe the credit cards nothing after the bankruptcy. The debts are forever discharged. In debt settlement, if you fail to pay the credit card company the negotiated amount, they can come after you for the debts, plus interest, and any applicable fees.

The following are issues you should consider when contemplating debt settlement:

  • Your credit score will suffer.
  • We CANNOT guarantee we will be successful in negotiating your debts down.

Bottom line is that debt settlement is a bankruptcy alternative for those who need to get out of debt because it is past the point where they can reasonably get out of their financial situation without a more drastic solution.

Can I be sued for my debt?

Yes, if you are in default. A creditor can sue you for the debts that you owe unless you work out a settlement, or file for bankruptcy protection. As long as your debts are in default, the creditor or its assignee can still file a lawsuit against a debtor. This is one of the advantages of using an attorney for debt settlement. The attorney can handle any lawsuits filed in an effort to collect the debt.

Are there tax consequences to debt settlement?

Another difference between filing for bankruptcy and debt settlement is tax consequence. In bankruptcy, there is no tax liability to the debtor for the discharge. In debt settlement the Debtor may need to report the canceled portion of the debt as taxable income. (See IRS Publication 908) The Internal Revenue Service considers $600 or more of forgiven debt as taxable income. The forgiving creditor must provide the taxpayer with a 1099-C tax form. You may need to consult with an accountant to determine any tax liability as a result of debt settlement and ways to defeat having to pay the tax consequences.

JC Law Group PC works with individuals and small business in debt. We offer debt settlement, Chapter 7, Chapter 13 and Chapter 11 services.