Are “Debt Management” Programs a Scam?

by Brett Weiss, Esq.

August 16, 2010

You’ve seen the ads for “Debt Management Programs”–”Settle $10,000 in credit card debt for as little as $2,000!” But do they really work? Do they make sense? Or are they scams?

Yes, they work. But only rarely do they make sense. And as for whether they are scams…it depends on your definition of a scam.

First, what are they? A Debt Management Program generally has you stop paying your credit cards and instead pay them a monthly payment for a period of time, usually a couple of years, until they have a nice pot of money. Then, they work out a lump sum settlement with your creditors, often at a substantial discount from the original amount due.

“Sounds good,” you may say. “So what’s the problem?”

The problem is that the actual savings are pretty much smoke and mirrors. Here’s why:1. They don’t do anything that you can’t do yourself. Debt, particularly credit card debt, doesn’t stay with the credit card company for long. As soon as it goes into default (typically when it hits 90 days past due), it’s sold to a debt buyer for pennies on the dollar. The debt buyer then sends you a letter offering you a huge discount for a lump sum settlement of the account. You pay the amount asked (or negotiate an even lower amount), send a check, and the account is settled, all without paying the Debt Management Program a penny in fees.

2. You may have to pay 1099-C taxes on the amount of forgiven debt. So if you have a $10,000 account and settle it for $4,000, you’ll be issued a 1099-C and have to pay taxes on the $6,000 in “income” you received.

3. By the time the firm has been paid enough to work out lump sum settlements, the additional interest, overlimit fees and late fees charged between when things start and when there is a settlement usually are about the same as the “savings”.

4. The overwhelming majority of folks never stick with the payments for long enough, which means that the debt management program charges obscene fees for doing *nothing*.

5. Creditors trash the client’s credit and often sue; none of this is stopped during the payment period.

I have had clients pay tens of thousands of dollars to these companies and ended up with very little benefit, when for a fraction of the cost they could have filed for bankruptcy, stopped the calls, letters and suits, and moved on with their lives.

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.

Last modified: December 22, 2011