THE FOLLOWING IS A PUBLIC SERVICE ANNOUNCEMENT SPONSORED BY:
LAW OFFICES OF BARRY STERNBERG
If you or someone you know is considering the use of a Debt Negotiation or Debt Settlement company it is imperative that you read the following warning before losing hundreds or even thousands of dollars.
If you have already been the target of a debt negotiation scam contact the Buffalo Office of the NYS Attorney General Consumer Fraud Bureau at (716) 853- 8404.
Debt Negotiation is a Consumer Fraud
Debt negotiation scams are not new. They have been around for the better part of 20 years. Unscrupulous shylocks know that people in tough financial straights yearn to believe there is an easy way out of debt. For people deeply in debt, the debt negotiator's sales pitch can be too appealing to resist: " we have the secret to getting you out debt for pennies on the dollar without filing bankruptcy." What is new is the way search engine and television advertising is allowing the debt negotiator to ensnare whole new groups of financially troubled and unwary people.
Is Debt Negotiation Possible?
Many creditors will agree to settle longstanding delinquencies for less than the full amount -- but only if your debts are already severely delinquent (a minimum of a year in most cases), and you have a significant sum of cash on hand to offer an immediate settlement. Debt negotiation is NOT credit counseling, where creditors will expect full payment of the debt by making monthly payments under a predetermined, voluntary repayment plan set up by qualified non-profit agencies or attorneys. Debt negotiation companies try to blur the distinction between credit counseling and debt negotiation to make themselves appear legitimate.
How Debt Negotiation Companies Steal Your Money
Since it is theoretically possible to settle delinquent debts for less than what's owed provided you have ready cash available, debt negotiators sell people on a scheme to save up enough money by making monthly "savings deposits" to the debt negotiator over time. When enough money is saved, debt negotiators claim they will contact creditors to arrange for the expected easy settlement. Now that you have been hooked, here is the catch! The standard debt negotiator contract requires that the first several payments into the account go towards the debt negotiator's fee. Not surprisingly, four months is usually about the time it takes to realize that debt negotiation simply doesn't work. Most people end up doing what they should have done from the start -- they see a bankruptcy attorney -- but not before losing a big chunk of cash to the bogus debt negotiator.
Why Debt Negotiation Doesn't Work
Most of your creditors will not work with debt negotiators. Creditors know about debt negotiation companies, and want no part of helping you dodge paying the full amount of what you owe. many credit card lenders instruct their employees to send delinquent accounts for legal action immediately upon discovery that the customer is working with a debt negotiator. Credit card lenders do not endorse a policy designed to cut their revenues in half. Unlike credit counseling where full payment is expected, there is no long term payment plan that creditors willingly accept through a debt negotiator.
Lawsuits, collection calls and letters won't stop if you start a debt negotiation plan. Most people consider bankruptcy or credit counseling because they want collection agents to stop making their life miserable. Unfortunately many people are duped into believing that debt negotiation schemes will stop the creditor harassment. Debt negotiators often instruct people to tell creditors they are working with the debt negotiator's company when they call. They will also tell people to forward any collection letters or legal process they receive to the debt negotiation company, implying that the debt negotiator will do something to stop the collection activity. When the debt negotiator receives your collection letters or legal process, however, all they can do is simply file them in the "circular bin." The collection calls and letters just keep on coming.
Debt negotiation ruins your credit. If you get hoodwinked into a debt negotiation plan thinking that you are settling debt while saving your good credit, you are seriously mistaken. The only possibility to settle a debt for less than what's owed is when that debt is hopelessly delinquent. Delinquencies, charge-offs and late payments are part of your credit history for a minimum of seven years, and they do not come off your credit report when the debt is settled or paid. Your history of non-payment remains long after your debts are paid or settled. Assuming it was even possible to complete a debt negotiation plan, it's true that you may not have filed bankruptcy, but your credit score will look the same as if you did.
Forgiven debt or a debt settlement is taxed as income by the IRS. Let's say you settle a $20,000 debt for half of what you owe, or $10,000. You didn't actually settle the debt for $10,000. At the end of the year the creditor is obligated to file a Form 1099 with the IRS disclosing the settlement, and you are taxed on the amount of the forgiven $10,000 debt the same as if you had earned another $10,000 from your job that year. The real kicker is since there was no withholding of the tax, as there is for wage earners, you likely will get hit with a huge tax bill at the end of the year, and now your right back in debt.
When delinquent debts are settled, the amount forgiven is mostly the high interest and late fees that have been accumulating while the debt has been delinquent. If you go to a debt negotiator when you're current with your bills, and thereafter are advised to stop making payments to the creditor for a year or more to allow the debt to be settled, late fees and exorbitant interest charges continue to mount. Even if the debt negotiator could settle the account, the amount of the settlement would likely be only for the late fees and interest that accrued since the debt negotiator told you to stop making payments. In other words, you're back to where you started from, minus the debt negotiators fees.
Debt negotiators are not authorized to operate in New York State. Only a non-profit organization or an attorney can legally represent people in settling debt in most states. There is a good reason! People with financial problems have long been the target of consumer scams, and the various states have passed laws limiting who is allowed to settle consumer financial accounts in an effort to curb these abuses. Unfortunately there has not been enough funding to enforce these consumer protection laws, and dishonest individuals can put up a website and solicit business through a post office box, then quickly set up shop under a different name when the consumer complaints start to pouring in. Don't be fooled by Better Business Bureau logos or the like that are pasted onto their slick looking web sites. As anyone who has ever received an "phishing" scam email from ebay or paypal can attest, it's easy to put a logo on a site to make it appear legitimate.
You can easily settle your own delinquent debts without a debt negotiator if you have a lump sum of money. Should you come into enough money and want to settle longstanding, delinquent debts, almost all creditors have certain set standards and rigid policies regarding the amount that can be accepted for a settlement. Usually that amount is based on the length of time the debt has been delinquent. In other words, debt negotiators do not get any better deal for you than if you were to call the creditor's Delinquency Recovery Department for yourself.
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