While most of my law practice is handling consumer bankruptcy cases here at my law office in Houston, occasionally I have a client that either can't file bankruptcy for some reason, or doesn't want to, and has some money with which to settle their debts.

For example, I finished a lady's debt settlement case recently who would not have passed the "means test" to qualify to file Chapter 7 bankruptcy. And she would have had to pay a lot of money each month to a Trustee through a 5 year Chapter 13 plan. And she had about $88,000 in unsecured credit card debt that was delinquent, and the bill collectors were calling her night and day. I was able to contact her bill collectors to make them stop calling her right away.

Then over 6 months or so, we were able to arrange settlements of her debt for 26 cents on the dollar, or about $23,000 to settle $88,000. She was able to pull the money from a retirement plan. And it cost her less than $2500 in attorney fees. I'm not saying all debt can be settled for that, but I thought this case turned out well for her, and she won't have a bankruptcy on her record.

But not all of my clients have access to that much money to settle. Another down side, the creditors can send 1099's to the IRS, and you may have to pay income tax on the amount of debt that is forgiven. It sounds kind of crazy at first, but the IRS figures, if you don't have to pay a debt, it is just like you made that much money, and they tax you on it.

There are exceptions to this tax problem, and a taxpayer can attach Form 982 to their tax return and avoid this result, if one of the exceptions applies. But I do not recommend that people use the "debt settlement" firms that you see advertising heavily on TV or the internet.

There have been cases where these firms have gone bankrupt themselves, and their clients have lost all the settlement money. At least one that I heard about, just absconded with all the money and the principals left town. And they are way too expensive.

Most of them charge a percentage of what they save you, application fees, monthly fees, etc., it's just way too much. And, under the Fair Debt Collection Practices Act (FDCPA), if a debt collector knows that you are represented by an attorney, they are not permitted to contact you anymore; they must go through the attorney. If you need help managing your bills or need to file a bankruptcy case, and you live in the Houston Texas area or surrounding counties, call my office at 713-772-8037, and make an appointment.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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