15 Jun Debt Management Programs: Better Than Bankruptcy?
Most of us get bombarded via e-mail, radio and TV by ads promising, “Avoid bankruptcy! Wipe out more than half of your credit card bills!” Sounds too good to be true. But do they really work? Well, sort of. But not quite in the way you might expect.
These programs typically work by telling you simply to stop paying your credit card debt and send monthly payments to them, building up a lump sum of cash to use for settlement. When the debt is charged off, the expectation is that the creditor will agree to settle the account for a lump sum at a discount. And in many cases, they do. But that’s not the whole story. There are many, many problems with these “Debt Management” programs:
1. The fees these programs charge are a significant percentage of the debt (and typically much, much higher than the fees for filing for bankruptcy), and you pay a lot (including “maintenance fees,” “set up fees” and “management fees” just for the privilege of paying these folks to work for you) before the company actually does anything for you. If you can’t complete the program or if the results aren’t what you expected, you don’t get these fees back.
2. Because you stop paying your debts and your account is charged off, your credit is trashed, and the resulting hit to your credit score can be worse than filing for bankruptcy.
3. You will receive calls and letters from collection agents for months, while these stop immediately when you file for bankruptcy (and if they don’t, you can sue the creditor for violating the automatic stay).
4. You may be sued by the creditor, while you can’t be sued once you file for bankruptcy.
5. You will get a 1099-C and have to pay income taxes on the difference between what you owe and what you pay, while you won’t get a 1099-C when you file for bankruptcy and discharge all your credit card debt.
6. There are no guarantees that the creditor will reduce the amount by anything approaching “less than half,” while a Chapter 7 bankruptcy will, absent unusual circumstances, result in your paying $0 on your credit card debt.
7. They can do nothing to help you with mortgage or car arrearages or tax debt, while Chapter 13 can give you 5 years to pay back these sums, normally without interest.
8. These programs don’t do anything that you can’t do yourself.
Get informed! If you’re considering using a “Debt Management Program,” be sure to ask these questions, and get your answers in writing. Speak with a bankruptcy attorney as well, and ask the same questions. Only then should you decide what is best for you and your circumstances.
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