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When people are in a financial crisis, they often turn to debt settlement and debt negotiation firms for help. While some of these firms legitimately help people resolve their debt, there are many that are out to make a fast dollar off an unsuspecting consumer. Consumers have spent large amounts of money only to find themselves in legal trouble after the firms took their money and did not make any payments to their creditors. A bankruptcy, on the other hand, can wipe out much of your unsecured debt, legally removing your liability to pay and freeing you of debt.

Debt settlement is a legal way to pay your creditors, sometimes at a significantly reduced rate, but it is not easy, fast or inexpensive. If a debt settlement firm is telling you otherwise, you should look for another option.

Smaller Payoffs

Your unsecured creditors will sometimes agree to a lesser payoff amount, knowing you could file bankruptcy, and they would get nothing. The way it works is your creditor agrees to accept part of the balance as full payment, and your account will be considered settled. If you are behind in several of your unsecured debts, this is where a third party could negotiate for you.

Debt negotiation firms are paid fees from the consumer. You will begin to send your payments to the agency instead of your creditors. You will be building up a cash reserve to be submitted as a lump payment to your creditors for a payoff. You do not want the debt settlement firm to hold your money but instead go into a trust account. The agency usually takes their fee from this account before sending any money to your creditors. These fees typically include a setup fee, an administrative fee, and a service fee.

Your Bills Not Paid

While your money is being sent to the trust account, all payments to your creditors will stop. During this time, your credit will be taking some negative hits. Even after you pay off the account, the negative marks will remain on your credit report.

Another interesting difference between payoffs and bankruptcy is that when a credit card company forgives some of your debt, they may send you a 1099 showing the amount not paid to them as income for you, and you will have to pay taxes on it. When you file bankruptcy, it will not be considered income, and you will not normally owe taxes on any accounts discharged.

If you have overwhelming debt, talk to a Citrus Heights bankruptcy attorney to find out what options you have to eliminate your qualifying debt.