Perhaps it’s the commercials on the radio touting “you can settle debt for pennies on the dollar – and not file bankruptcy!” or “you have the right to settle your debt!” Or, perhaps it’s the desire to exhaust all options before filing bankruptcy. Regardless, I’ve seen many clients come through my office absolutely disgusted with the debt settlement process. And for good measure.
What are debt settlement companies?
Debt settlement companies, tout that they can renegotiate, settle, or completely eliminate your debt by working with your creditors. However, dealing with these companies is risky and can lead to devastating results.
Dealing with debt settlement companies carries several risks.
Don’t just take my word for it. The Consumer Financial Protection Bureau (CFPB), a U.S. government agency tasked with making sure banks, lenders, and other financial companies treat you fairly, outlines several risks you should consider before dealing with a debt settlement company:
- Debt settlement companies often charge expensive fees.
- Debt settlement companies often encourage you to stop paying your credit card bills. Doing so results in late fees, penalties, interest, and other charges. And creditors can – and will – step up their collection activities against you.
- Debt settlement companies may refuse to settle debts less than a certain dollar amount.
- Some creditors may refuse to work with the debt settlement company.
- In many cases, the debt settlement company will be unable to settle all of your debts.
- Debt settlement companies often require you to deposit your money into a dedicated bank account, which will be managed by someone else. You may be charged fees for this account.
- Creditors can still sue you even while you are working with a debt settlement company.
- Unless the debt settlement company settles all or most of your debt, the increased penalties and interest will wipe out any benefit or savings the debt settlement company achieves on your behalf.
- Using a debt settlement company will likely have a negative impact on your credit score and your ability to get credit in the future.
For-profit debt settlement companies prey on those in dire straights. Contrary to what debt settlement companies will tell you, there are no “government programs” or other laws they can use to force creditors to bend to their will. The CFPB recently sued a debt settlement company called Freedom Debt Relief for misleading consumers about its negotiating power, the reach of its services, its fees, and consumers’ rights to their own funds. You can find the complaint here.
Bankruptcy offers several benefits over debt settlement.
Bankruptcy is cheaper. Bankruptcy offers the ability to be free of debt for much less than what debt settlement companies typically charge. A typical chapter 7 bankruptcy costs around $1,600. Depending on the amount of debt, I’ve seen debt companies charge $600 or more per month for their services.
Bankruptcy is faster. Bankruptcy also offers the ability to be free of debt in much less time than what debt settlement may take. A chapter 7 bankruptcy can often be completed in three months, and a chapter 13 can last 36 to 60 months. Debt settlement companies won’t tell you – and often cannot tell you – how long the process will take as it is completely driven on creditor participation. So you wind up making monthly payments with no end in sight. And as the CFPB mentioned, in many cases, the debt settlement company will be unable to settle all of your debts.
Bankruptcy stops collections. Federal law provides what is called the “automatic stay” which prohibits creditors from continuing to collect a debt; including making phone calls, sending letters, filing lawsuits, and continuing wage garnishments. Debt settlement offers no such protection. And in many cases, creditors will accelerate collection efforts due to growing past-due balances.
Bankruptcy can help stop foreclosures and repossession. It also offers the ability to eliminate debt while keeping your home, car, and other property. Even if you’re enrolled in a debt settlement program, creditors can continue to foreclose on your home or repossess your car. You may also end up having to sell some of your property in order to continue to make the monthly payments to the debt settlement company.
Bankruptcy favors a fresh start. Filing bankruptcy forces creditors to play by your rules. That is, they are required to appear in one place – the bankruptcy court. Bankruptcy courts are generally debtor-friendly. Creditors must also follow the Bankruptcy Code, which favors providing debtors a fresh start. Debt settlement is a voluntary process. Creditors may choose not to work with the debt settlement company.
Bankruptcy can help improve your credit scores. Receiving a discharge in bankruptcy resets your debt-to-income ratios, your credit usage ratios, and stops negative reporting by creditors. All of these factor heavily into your credit scores. Debt settlement companies often encourage you to stop making payments to creditors. While doing so will help fund your monthly payment, your balances will become delinquent and go into default status. Meanwhile, creditors will continue to make negative reports to the credit bureaus. Over time, your credit scores will become more damaged through this process than by simply filing bankruptcy and eliminating your debt.
Bankruptcy can help with new credit. Along the same vein, you can acquire new credit after filing bankruptcy. In addition to the above-factors, creditors are eager to help debtors re-establish their credit. After all, that’s how they make their money! However, debt settlement may prevent you from acquiring new credit due to continued reporting of past-due balances.
Ready to Take the Next Step?
If you’re ready to take the next step, I encourage you to contact me or call (317) 830-5993 for a free, no obligation consultation. We’ll meet face-to-face and discuss your particular situation. We’ll review your options under the Bankruptcy Code, discuss whether a chapter 7 or chapter 13 bankruptcy is a right fit for you, and develop a strategy for getting you back to the life YOU want to live!