In these crazy economic times, television and other media are filled with commercials advertising for debt reduction by debt settlement companies. USE CAUTION in going this route. One frequent scenario with a debt settlement company is they have you stop paying all your unsecured debt, such as credit cards and signature loans. Instead, you pay the company for a number of months for their fee for future services. This will obviously cause your credit cards to go to a default rate if they are not there already. You may also be sued by your creditors.
There is no guarantee that the debt settlement company will be able to settle your debts by reducing principal or interest. If your debt is partially forgiven, you could have tax liability on that portion of the debt that is forgiven. You will receive a 1099 at the end of the year for the difference between what you owed and what the debt is reduced to by the forgiveness. This could be taxable income to you. In addition, most debt settlement companies will charge you a percentage of the reduction as an additional fee.
Extreme care should be taken before signing up for one of these programs. Make sure they are reputable and understand how your monthly payment is going to be allocated and what fees you will be paying. Consult with an attorney and compare your options, both bankruptcy and nonbankruptcy.
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