We have all heard the saying “If something sounds to good to be true, it probably is…” However, Americans tend to be optimistic rather than cynical and often “sold” on promises made over the phone. Companies that promote “settling” your consumer debt have sprung up everywhere in the current economic crisis. Even before the recent “debt relief” phenomenon, the “tax relief” industry had been growing for years. Both industries have come under scrutiny and on October 6, 2010, the FTC shut down American Tax Relief. This company was based in California and ran ads on radio and TV promising to settle tax debts. The FTC say the owners of American Tax Relief enjoyed a lavish lifestyle while bilking consumers out of $60 million.
There are problems in the debt and tax settlement industry beyond American Tax Relief. JK Harris has had to settle a class action lawsuit. Taxmasters is facing a lawsuit from the Texas Attorney General. California’s AG has filed a lawsuit against Roni Deutch for more than $34 million alleging that her law firm regularly violates state law by making false promises. California asserts that Deutch overstates her TV claims of winning tax battles. She advertises a success rate of up to 99%, yet successfully reduces the amount of money her clients owe in taxes in just 10% of cases, the lawsuit says. Many “tax relief” and “debt relief” companies have gone under. New regulations are to take effect on October 28, 2010 regarding telemarketing of tax and debt relief services. These new rules will limit up front fees.
If you are behind on your credit cards and can’t honor your commitments due to the current economic debacle, there is nothing the so-called “debt settlement” firms can do for you that you can’t do for yourself. Most unsecured credit card debt can be settled on your own for 50-80% of the bill if you have the lump sum available to make a deal. Once a debt goes to a collection agency, they often will offer a deal to you on their own. A lot of it depends on what state you are in as the laws vary a great deal in each state. A very few states are “debtor friendly” like Texas where wages can’t be garnished for credit card debts. Most states are creditor oriented. In Minnesota, for example, folks go to jail sometimes for missing court dates involving credit card debts.
Hiring a debt settlement company for credit cards is risky because your creditors can still sue you and take civil enforcement actions if they secure a judgement. These firms do not prevent creditors from taking action. They merely contact the companies and try to negotiate a “deal.” No professional license is required for these outfits and it could be some guy in the back room who didn’t graduate high school trying to work with your credit card company. Retaining one of them does not guarantee that collection calls will stop either. If you are behind on credit cards, consider a non-profit consumer credit counseling agency. They can help you work out a payment plan with unsecured creditors if you are able to pay something each month. If you can’t pay, and don’t have money to settle the debts yourself, one option is to roll the dice and see if your creditors do move to get judgements or not. Another is to see an attorney about bankruptcy.
For those with tax debts to the state or Feds, a CPA, Attorney, or Enrolled Agent can help you with these issues. Taxes are complicated and usually are not a “do-it yourself” project unless the debt is under $25,000 and you can pay it over 60 months. IRS has a streamlined process for working with taxpayers in that situation and you could contact them yourself for that plan. If you owe more than $25K, I do recommend professional help, but not a “tax relief” outfit. Hire a person who is licensed or professional firm of CPAs, EAs, or a Law Firm, not a company that uses salesman and outsources the work. Often these companies go out of business leaving customers and the tax professionals they outsourced the work to on the hook. In that scenario, clients are out of fees paid and professionals owed fees and left to give the bad news to the clients. I made the mistake of taking work from a tax relief firm and they went under owing me money and leaving clients hanging. I’ll never make that mistake again.
If a guy calls you on the phone selling tax or debt relief, hang up. Don’t be fooled by a flat fee promise. Find a local professional. If you can’t find a local pro, hire someone who might be out of town but has a good reputation and is a member of a professional society like the AICPA, NSA, NAEA or State Bar. The National Association of Enrolled Agents has a tool on their website naea.org to find a local E.A. If you live in Oregon, only a tax professional licensed with the state can help you with the Oregon Revenue agency.
Here are the web address listings for some other organizations that can help you find a professional: