The National Association of Consumer Bankruptcy Attorneys (NACBA) recently issued a Consumer Alert, notifying Americans that debt settlement companies can be a trap.

I have seen it before numerous times. Consumers come into my Houston law office, and they've had enough. They've tried to pay their debts, first by themselves. When their creditors would not allow them to pay at a level they could afford, they called a "debt settlement" or "debt negotiation" company that they found on the internet.

They signed up, and part of the deal was for them to start paying payments to the company, who would then use the money to pay creditors. Well, most of the time, the companies charge an outrageously high fee, and collect it first. It is often a percentage of what they estimate that they can save you. That sounds reasonable, but in practice it is too much.

Many of them also charge a monthly fee. Even if the company would be successful in settling all of a consumer's debts (which is rare),  the price is not much of bargain. Besides, your credit is wrecked, because you have to stop paying your debts and allow them to "charge off" before most of the credit card companies will even negotiate.

Not only that, but the amount of debt "forgiven" by the credit card companies can be taxable by the I.R.S. There are exceptions to this requirement, for example forgiven debt is not considered income to you if you are "insolvent" or you file bankruptcy.

But think hard before you hire a debt settlement company. Most of them are not even complying with Texas state law concerning how they must operate. Most people are better off filing a bankruptcy or a chapter 13 reorganization plan, than doing a debt settlement.

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