Bankruptcy vs. Debt Settlement Companies
Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.
You owe, you owe, so where to shall you go?
Consumers facing debt problems are worried about their situation and sometimes confused about the reality of debt settlement companies as an alternative to filing either a Chapter 7 or Chapter 13 petition in bankruptcy.
Some consumers believe that it is better for their credit rating not to file a bankruptcy and attempt to use a debt settlement company, or that they can avoid legal fees and/or being sued, by using a debt settlement company. Some believe they can settle all of their debts with a debt settlement company.
The answer here is easy: WRONG!
Before I get into the differences and disadvantages of using a debt settlement company, allow me to provide a link from the New York State Attorney General, regarding debt settlement companies: https://ag.ny.gov/feature/debt-settlement-companies
It’s less than a page to read of accurate information, but it will set the stage, (from an official with no dog in this fight) that will support what I am saying in this post.
Does a debt settlement company have a fiduciary relation with its clients—the mandate to deal in good faith and maintain the interest of the client above their own interest?
Does a bankruptcy lawyer have a fiduciary relation with his clients?
Can a debt settlement company stop you from being sued by creditors?
Can the filing of a bankruptcy proceeding stop you from being sued by creditors?
Do creditors have to deal with and make a deal with debt settlement companies?
Do creditors have to obey a court order from the bankruptcy court staying all of their collection activities against you?
Debt settlement companies will direct you to stop paying your creditors, and make monthly escrow deposits with them. When the escrow is deemed sufficient, they will try and deal with creditors on your behalf to get them to accept less—arguing that they offer a better alternative to the creditor than your filing a bankruptcy.
Great, except for a few things: debt settlement companies usually deal with unsecured debts only. This leaves out little things like car payments and mortgage payments, (usually your two most expensive payments).
While you aren’t paying your creditors, your interest and penalties keep going up, your credit rating keeps going down, and there is absolutely no guarantee that the creditor is going to deal with the debt settlement company, because they don’t have to.
Often, if the debt is sufficient, you are going to get sued, and eventually file a bankruptcy petition anyway. Debt settlement companies have absolutely no power to stop the filing of lawsuits against you.
Many states’ Attorney Generals have taken action against deceptive debt settlement companies. This is not to say that all debt settlement companies are deceptive, but even the legitimate ones have little power or authority with creditors—they aren’t attorneys backed up by court orders.
Research shows that a majority of consumers don’t continue with escrow payments in a debt settlement plan, and guess where the company’s fees come from? Right; they get if from escrow money. They take a percentage of it, and getting back the balance of your payments may be either difficult or impossible.
Does this sound like something you would like to do? Keep making monthly payments to a debt settlement company, ruin your credit by stopping the payment to all of your unsecured creditors, (because if you do it with secured creditors, say goodbye to your car or your home), build up additional interest and fees, and likely wind up getting sued?
Does that sound like a good plan?
You want to pay your creditors back according to a sound, court ordered plan? You want to deal with secured creditors as well as unsecured creditors? Do you want a repayment plan that creditors must accept once approved? Chapter 13 bankruptcy is the answer.
Do you only own property that is exempt from disposition under the bankruptcy laws, and you want to get rid of your debts—wipe them out once and for all--with a court ordered discharge? Chapter 7 bankruptcy is the answer.
You want to stop your creditors from any further collection attempts, you want to put an end to lawsuits, you want to pay one legal fee instead of ongoing escrow payments to a debt settlement company that really can’t do anything for you that you couldn’t do yourself?
Contact an experienced bankruptcy attorney, who not only has your best interests at heart, he has to have your best interests at heart—by law. It is mandated by the law that you get debt counseling prior to filing a bankruptcy petition anyway, if you are interested in that.
There’s a reason there have been a multitude of government enforcement actions against members of the debt settlement industry, and it’s not because of their unstained reputation and unparalleled performance on behalf of consumers in debt.
Dealing with creditors takes professional credentials, knowledge, experience, and a requirement of good faith dealing on the part of your legal representative, your lawyer. Debt settlement companies don’t have professional credentials, (for the most part), needn’t have much knowledge or experience, and are not required to put your interests above their own.
So maybe the choice isn’t all that confusing, now that you know what you know about the difference between alternatives.
If you are facing lawsuits from creditors, if collection calls are driving you insane, if you can’t take the pressure of being deep in debt anymore, the real solution to your problem lies in obtaining competent experienced legal counsel now, and learning your rights and obligations under the bankruptcy laws.
If you can’t pay your debts, it comes down to a choice you have to make: filing bankruptcy, or likely failing to resolve your creditor problems by using a debt settlement company. The choice is yours.
While your thinking about it, check out the New York City official warning about Debt Settlement Companies, https://www1.nyc.gov/assets/dca/downloads/pdf/consumers/Consumers-Beware-Debt-Settlement-Services-English.pdf then after reading it, call my office for experienced and caring legal advice and assistance with respect to your rights under the bankruptcy laws of the United States of America.