Debt Settlement Companies or Bankruptcy

By: Robert J. Harris

On today's MSN Money website, there is a great article called "10 Secrets of Filing for Bankruptcy". All the tips are valuable, but because this is a BLOG, and I know people reading this may have come here looking for bankruptcy alternatives, I want to focus on tip number 5.

                             "Debt Settlement Companies May do More Harm than Good"

Debt settlement firms offer to play hardball with creditors and whittle outstanding balances by as much as 75%. They bill their services as an alternative to bankruptcy, but in many cases they can hurt more than they help. Debt settlement firms are unregulated, for-profit entities that require regular payments before taking any action on a consumer's behalf. This business model works squarely against debtors' interests, says Walter Benenati, a bankruptcy attorney in Orlando who worked briefly for a debt settlement firm. "They're getting fees every month, so they have no incentive to settle (with creditors) as fast as possible," he says.

In fact, you don't need a middleman to negotiate with creditors. But, says Mariana Bekker, director of media relations for the United States Organizations for Bankruptcy Alternatives, a debt settlement trade organization, most debtors don't have the "time, stamina or desire" to do it themselves. Either way, you'll owe taxes on any amount saved on your debt. (That's right: The IRS considers forgiven debt taxable income.)

About a year ago, I had a representative of a "debt settlement company" call me and asked me to refer people to him. He told me if I did, he'd refer all his clients to me. He said that none of them ever complete their payment plans anyway, so I'd get a lot of work. Needless to say, I didn't do business with that gentleman.