Debt Settlement Companies, Debt Negotiation, Debt Consolidation — Billed as Bankruptcy Alternatives, but Are They Really?

11 Oct Debt Settlement Companies, Debt Negotiation, Debt Consolidation — Billed as Bankruptcy Alternatives, but Are They Really?

No one wants to file for bankruptcy, so many companies use that to pull people into their “programs” by promising all sorts of good ways out of debt. Anyone who has listened to the radio lately, perhaps while driving a car or doing laundry, has heard ads that go something like this:

“Don’t file for bankruptcy — call us.

We are a nonprofit company called Blah Blah Debt Blah, we will get you out of debt in no time!”

My favorite refrain in an ad like this is, “Don’t pay your debt, eliminate it!”

These companies advertise as though they have a secret that will cause your debt to magically disappear as soon as you take a moment to call their toll free number and sign up for their service.

As a [bankruptcy] lawyer, I hate these ads.

One of the reasons I dislike them so strongly is that they truly seem to air constantly on the radio, and there is precious little information on the airwaves that runs counter to the myths which they try to perpetuate in the minds of their listeners.

In fact, as I write this, I feel an overwhelming urge to shout my counter message from the highest mountain top…errr maybe the most powerful of mainframe computers. (And yes, I am about to engage in a netiquette no-no — the use of all-caps. Please indulge me just for a second. If you can’t take it, close your eyes):

  • DON’T BELIEVE THESE ADS!
  • DON’T CALL THESE COMPANIES!
  • DON’T FALL FOR THESE “DEBT SETTLEMENT” AND “DEBT ELIMINATION” PROMISES!
  • BANKRUPTCY IS OFTENTIMES YOUR BEST, PERHAPS YOUR ONLY, REALISTIC OPTION!

You may be thinking that the reason I feel so strongly about this is that these companies are eating my lunch. They are stealing my potential client base. Well, that might be part of it. But unfortunately, it is only a small part of it. I use the word “unfortunately” for good reason — I have seen too many victims of debt settlement plans gone wrong.

Let me put that in stronger terms: I have never seen a debt settlement plan go right.

The story is very typical. The victim is usually bilked for real money, on average between $3,000 and $6,000. The debt settlement company usually has ACH access to the victim’s checking account. There is almost always an obnoxious “arbitration clause” in the contract between the debt settlement company and the victim.

It is very unusual for any debts to have been “settled” or “eliminated”. The debt settlement company will automatically extract a monthly “maintenance fee” from the victim in the neighborhood of $200 to $300 from the victim’s account using their ACH access without ever actually offering any services of value to the victim.

While extracting their fee from the victim every month, they will advise the victim to deposit a certain amount into a separate account every month. (The practice of keeping this “separate account” will differ from state to state. In Pennsylvania, it is unlawful for a debt settlement company to maintain custody over the funds, therefore, in PA, they will usually leave it up to the victim to open a new account and to deposit the requested amount into that account every month.)

The concept is that once the victim has accumulated a certain amount for settlement purposes, the settlement company will have the leverage they need to negotiate a favorable “settlement” with one or more creditors. I have rarely, if ever, seen it work out that way.

Denise Hall, owner of “Home Business on a Budget”, does a great job of identifying the scam of debt settlement in her article published to Ezine Articles at this link. She says there are two different types of services being offered — Debt Settlement and Debt Consolidation. Most of her venom is directed toward the Debt Settlement companies. Her article contains great analysis and is worth a look.

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