Debt Management Programs: Better Than Bankruptcy?

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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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.
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