Debt Counseling Services & Tax Liability. Learn Why Chapter 13 & Chapter Is a Better Option for Many..

Read why you should you stay away from  those who offer "pay first services". Find out if they are using your financial hardship to get your money by giving you hope only to end up owing more than you did.

Is Bankruptcy Better Option Than Debt Counseling Services? Find Out

This is a "Must Read" Article!  Part 1 

Part two click here

Dangers Of Debt Counseling Services

Debt Counseling Services can create a tax liability. Learn why Chapter 13 & Chapter 7 Is a better.

As a consumer in debt you must be aware of debt counseling or debt management programs and bankruptcy through Chapter 7 and Chapter 13.

The truth is many so-called consumer counselors are just out to make a buck off of you. It is an unfortunate truth that not everyone offering to help you actually gets your finances under control.  They don't really have your best interest in mind. Consider ALL debt consolidation loans carefully.  In the end you will discover that most of the them are NOT in your best interest.

The purpose of a consolidation loan is to consolidate all of your debts into one monthly obligation. This is appealing to most since the interest rates are much lower than the credit card's interest rates. The problem is, if you become unable to repay it, you may be stuck with the whole debt as a secured loan. If you are not sure that you can really repay that amount this is not an option for you.

If you can't pay your present unsecured debts, all your creditor can do is sue you and try to collect any judgment they are awarded.   If you can't pay your home equity loan, you may lose your house in foreclosure or you may have to file a Chapter 13.  If there is still equity in the home you may be stuck with that payment.  If you would have discharged the unsecured debt in the past, you would not have a second you can't pay.  Home equity loans may sound great but it could lead to your losing your house.   

Most states including California, provide an exemption that protects a given amount of equity in your home and puts that equity beyond the reach of your creditors.  If you voluntarily pledge that equity to a home equity lender, the exemption no longer protects the pledged portion of your home's value in most cases.  

IMPORTANT! BE VERY CAREFUL --- There are many so-called companies promising that they can save up to 70% on credit card debt and will charge you a fee (monthly) and a management fee.  During the time they are collecting the funds, none of it is applied to the credit card or other unsecured debts at the time of collecting  fees from you.  Also, if you fail to make just one payment and with most just late in making the payment to them, they can keep all of the fees you paid to them.  On top of that, the unsecured debt holder will continue to charge you high interest and late fees. So if the debt doubles due to the interest and fees even with 50% off you are paying what you originally owed when you started their plan. Remember if it sounds too good to be true, it probably is.  Just because they make a promise or have some office space, it does not make them honest.

IMPORTANT!  Never authorize any collection service to gain access to your checking account and direct withdrawal. I have seen too many of these kinds of businesses take your money.  The debtor then comes into my office after paying many thousands of dollars asking me to get them out of debt.  Most of them who had utilized these collection negotiation services had direct withdrawal.

Under the bankruptcy code the two major types of  businesses are considered debt relief agencies are attorneys & bankruptcy petition preparers.  Under the new bankruptcy law of 2005 any person, business or otherwise who are compensated to help with your bankruptcy are now considered a debt relief agency and must identify itself as such.  That is why you'll see the following statement on each of our web pages:

Non-profit credit help agency:

If you sign up with non-profit credit help agency that offers a program where their service negotiates with your creditors or makes payments on your debts for you, you should understand whether the service promises to lower the total you owe or the interest rate you pay, or just promises to lower the payments you make every month, without significantly changing your obligation.  Know what happens if a creditor won't negotiate.  Many of these non-profit groups can work out a non-binding agreement with the unsecured debt holder.  They will get your interest rate cut and many times have success in lowering in the credit card balance. 

The debt settlement model in which you set aside money with a third party who will attempt to negotiate a reduced payoff seldom solves your debt problems. Creditors seldom accommodate such approach which is why the debt settlement company pays themselves first.  In our opinion, these kinds of business should be banned since they almost never work out to your benefit. Their plans are bound to fail this is why they get paid first!

The IRS treats debts that are forgiven or reduced, outside of bankruptcy, as taxable income.  That means that if your creditor agrees to settle the debt for 50% of what you owe, the other 50% will be reported to the IRS as income, just as if they had written you a check for that amount!  Under some circumstances, you can avoid cancellation of debt income, but it raises a complicating factor when you compromise debts outside of bankruptcy.  Let's say you are in a 28% tax bracket of the cancellation or the cancellation puts you in the 28% bracket.  On cancellation of $20,000 x .28 = $5,600 in taxes you will have to pay the IRS.  If creditors cancel a personal loan of $100,000 you could be responsible for $28,000 or more in taxes.  Certainly, filing a chapter 13 is well worth it at that point.

Far too often, debtors make things worse trying to do what they feel is the right thing. Most of the time the money problems only get worse by enlisting others to help with  pre-paid debt management that is not court approved and you have a court order to back you up. While it may seem comforting to have someone who promises to get you out of debt by paying them money to negotiate on your behalf with the creditors,  most of the time they  end up in my bankruptcy office or some other.  

Chapter 13 requires creditors: 

After filing bankruptcy you have no outstanding debt and cannot file for another eight years. In fact, you look like a much better candidate for credit card companies after filing bankruptcy. You even have the money to pay the credit card amount each month without any interest charges.