Debt settlement companies promote their services as an alternative to bankruptcy. Certainly any struggling consumer should consider both bankruptcy and non-bankruptcy alternatives, but our experience has been that the debt settlement industry is plagued by fraud and deceptive practices.
You are likely to see “credit management” or “debt settlement” services advertised in the phone book, on a telephone pole (!) or advertised through unsolicited mail. Some of these services offer to clear your credit file or to get you a new credit file. Often private credit counseling companies demand a large up front retainer and they promise more than they can deliver. Recently several of these companies have been in the news when they have been sued by a State Attorney General for consumer fraud. Usually, these organizations are rip-offs and you should avoid them.
Do not be taken in by the term “non-profit” as meaning that the credit counseling company is performing a public service. Frequently a private debt counseling agency will operate as a “non-profit” while the owners profit handsomely through the “management” company that contracts to operate the non-profit. If you are considering using a private debt management company, be sure to check out its reputation with the Better Business Bureau and the Georgia Governor’s Office of Consumer Affairs.
Finally, you should realize that it will take a great deal of both discipline and money to pay off substantial credit card debt. For example, if you have $10,000 in credit card debt and you want to pay it off in two years, you will need to pay $520 per month; in three years, you will need $382 per month. If you wanted to pay off the $10,000 at $200 per month, it would take you over ten years. Credit card debt is especially stubborn to eliminate because of the high (18% to 20%) interest that keeps adding up.
Will Budget Reduction Plans Solve My Debt Problems?
A visit to your local bookstore will reveal a number of well-written guidebooks that offer help to debt burdened individuals. If your debt is not totally out of control, and if you have the discipline to modify your lifestyle (e.g., using public transportation instead of a private car), and if you are not facing lawsuit threats, then some of these programs can work.
The practical problem with budget based debt reduction plans has to do with time (your creditors will not hold off indefinitely) and lifestyle (are you really willing to significantly change how you live?). There is certainly no harm in trying a budget based debt reduction plan and if you do end up filing the changes in your budget will most likely be bankruptcy friendly.
The Bankruptcy Option
Bankruptcy offers some significant advantages over non-bankruptcy debt settlement, but there are some pitfalls as well. The biggest benefit arises from the nature of bankruptcy – it is a legal process, not a voluntary one. The minute you file bankruptcy, the automatic bankruptcy stay provides enforceable legal protection against creditor action. Any creditor or collection agency that violates the automatic stay can be fined or worse by the bankruptcy judge.
Any legitimate creditor or collection agency recognizes the power of bankruptcy relief and usually will not attempt to circumvent it. By contrast, in a voluntary debt settlement situation, creditors and collection agencies will try to negotiate the best possible deal to benefit their company.
Bankruptcy also offers a more complete and predictable solution. For example, when you file a Chapter 7 or Chapter 13, all creditors will be bound by the law. Further, your relief will be more complete. When a debt is discharged in bankruptcy the certainty of the legal process means that that debt is forever extinguished.
Debts “resolved” through a negotiated settlement sometimes have a nasty habit of reappearing when the loan paperwork is sold to a new debt buyer.
Bankruptcy also usually results in a faster rebuild to your credit because of the certainty factor.
Bankruptcy will be more damaging to your credit in the short run and certain creditors (i.e., American Express) will not do business with you going forward.
If you are thinking about pursuing debt consolidation, take a few minutes to compare that option to bankruptcy. We’d be happy to offer our perspective – just call Susan or Jonathan at 770-393-4985.