Smart Money came out with a good story about Five Reasons to Avoid Debt Settlement Companies, and I approve wholeheartedly. For their story go to: Excellent article, please read it.

I would add a couple of reasons:

Reason #6 To Avoid Debt Settlement Companies- They may be operating illegally in the State of Texas.Most of the true “debt settlement” companies are operating illegally, when they operate in Texas. The State of Texas regulates debt settlement companies, and they are required to be registered with the Office of the Consumer Credit Commissioner, make numerous disclosures to consumers, be an IRS approved non-profit company, etc. Most of them don’t. Is the one you are planning on using properly registered? Go to and look under “Debt Management Service Providers.”

If you are a Texas resident, and your debt settlement company is not listed, they are likely not operating legally in Texas. If they have violated the act, you may have a right to recover from them: (1) all the money you’ve paid them; (2) any actual damages you’ve suffered as well as punitive damages; (3) attorney fees for enforcing your rights; and (4) injunctive relief . To see the law in Texas that regulates these companies, go to Chapter 394 of the Texas Finance Code.

Reason #7 to Avoid Debt Settlement Companies: The Amount of Debt Forgiven May be Taxable Income to you. While I am not proposing to give you tax advice here, the I.R.S. believes that if one of your creditors forgives a debt, or part of a debt, then it is just like you MADE MONEY, and they want to TAX YOU ON IT. Some debt settlement or debt negotiation companies will tell you this up front, others won’t. The I.R.S. will be happy to tell you about it, particularly when you settle a debt. Let’s say you hire a debt settlement company, and after paying them, they actually settle a debt for you. Let’s say it’s a $10,000 debt, and they arrange for you to pay $5,000 in full and final settlement of the debt. The OTHER $5,000, the $5,000 that your creditor gives up or forgives, can be TAXABLE INCOME TO YOU, and they will send a 1099 to the I.R.S. Don’t believe me? Go to the IRS web site and see for yourself at Tax Topics.

There are exceptions to this general rule, such as if a debt is discharged in bankruptcy, or if you can prove you are “insolvent” when the debt is forgiven. But it is definitely something to consider, before you go settling a lot of debt. You don’t want to trade unsecured credit card debt for debt owed to the I.R.S.! They can levy on your wages and bank accounts.

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