Texas residents who are having financial difficulties sometimes choose to pursue debt settlement instead of filing for bankruptcy. Debt settlement companies offer to negotiate with creditors to lower the amount owed or monthly payments in return for a fee, but taking this path may leave consumers in an even worse position. There is no guarantee that creditors will accept less than the full amount, and any savings that are realized may be meager after the debt settlement company and the Internal Revenue Service have taken their share.
The IRS plays a role because forgiven debt is considered income, and consumers must declare this money on their income tax returns. Debt reductions are also reported to credit monitoring companies like Equifax and TransUnion, which will usually result in lower credit scores. Consumers who do decide to explore debt settlement may be wise to consult with an experienced attorney who would have a fiduciary responsibility to act their best interests. Debt settlement companies are generally not bound by such a duty.
Consumers sometimes choose alternatives to a Chapter 7 bankruptcy because they are worried about damaging their credit. However, borrowing may actually be easier after a bankruptcy has been discharged. This is because a Chapter 7 bankruptcy will usually improve debt-to-income ratios as most personal debt is wiped out. Lenders also know that individuals with a discharged bankruptcy cannot file another Chapter 7 petition for at least eight years.
Attorneys with experience in this area may detail the advantages and disadvantages of bankruptcy and the alternatives to bankruptcy. They may also clear up the many misconceptions and myths surrounding debt relief and explain that an automatic stay is issued when a personal bankruptcy is filed. This requires lenders to cease collection efforts, stops wage garnishments and puts a halt to lawsuits filed by bill collectors.