An alternative to bankruptcy always sounds enticing to consumers. “Don’t file bankruptcy,” warns every debt settlement company on the TV, radio, and internet, feeding that desire. With names like Freedom Debt Relief and National Debt Relief, they sound welcoming. But instead of paying your debt, these companies want you to start paying them, often for years, and automatically every month to boot. They pitch the idea that the money you are paying them will go into a savings account, and will be used to settle your debt for pennies on the dollar, without having to file bankruptcy.
The problem with this is that it almost never works. Why?
- While you are giving them your money, you go into default with the credit card companies.
- When you go into default, your interest rate skyrockets.
- Your late charges and fees also go up.
- You start getting sued by credit card companies.
- Your wages get garnished.
- If you actually “save” enough money to make a settlement offer, you are making it on a much higher amount than you owed before.
- If you settle for a discount, the discount you settled for is almost as much as you owed in the first place.
- If you “settle” a debt, you will receive a 1099MISC tax form which you will have to report on your tax return. The IRS considers the money you didn’t pay back income you received. In bankruptcy, there are no tax repercussions.
- The “debt settlement” company wants a big fee for doing what it did for you. Most people never successfully finish a debt settlement plan. This is their business model. They want you to cancel out after you have spent a year paying them your hard earned money.
I listen to these ads on the radio. Do you? The voice is always soft and soothing. They have “secret information the credit card companies don’t want you to know” which they are going to share with you – you’re special, right? – just for calling them. They say, “Don’t file bankruptcy” and “let us save you thousands.”
Once a consumer gives a debt settlement company his or her money, they tell the consumer to stop paying on their respective debts and to pay the debt company instead. Unfortunately, no one notifies the consumer’s creditors of this fact, causing these accounts to go into default. Interest rates will skyrocket, and late charges and fees will be assessed on these accounts. If too much time goes by, the consumer will find himself or herself on the receiving end of a lawsuit for collection, which can result in wage garnishment. During this time, the debt settlement company is allegedly working with the consumer’s creditors on settling the debt. Most people never successfully finish a debt settlement plan, which is the business model for most of these companies. They want the consumer to cancel after paying the company an exorbitant amount of fees for services that were never rendered.
Here are the tell-tale Signs of a Debt Relief Scam:
Beware of debt relief and debt settlement companies doing the following.
- Seeking payment upfront.
- Contacting you by phone or email.
- Using pressure tactics to get you signed up quickly.
- Promising or guaranteeing results.
- Advising ceasing communication with creditors.
- Company originating out of California
- Requiring financial details or payment before explaining their services.
- Touting “new government programs” or other legal loopholes that can get you out of debt.
- Promising to stop all debt collection calls and lawsuits. The Fair Debt Collection Practices Act gives you (and third parties acting as your agents) the right to tell debt collectors to stop communicating with you. Nothing short of bankruptcy protection can stop a creditor from filing a debt collection lawsuit against you.
I say to you, Debt Settlement Companies are scams and will almost always leave you worse off than they found you. Even “legitimate” debt relief / debt settlement companies generally don’t do anything you cannot do yourself for free. There is nothing preventing a consumer from working directly with their creditors to make payment plans on their debt. Debt settlement companies typically keep 15% to 25% of the total debt amount for each settled account as payment, so the total savings to you could be minimal. Debt relief companies also charge fees for setting up and maintaining the savings account as you pay off settled debts, which could take many months, even years, depending on the negotiated terms.
Many times, going through debt settlement is only delaying the inevitable. Oftentimes, it is best for the person to go directly to the creditor and see what can be done to get a hardship deferral or reduction in what is owed. Sometimes they will work out a lower interest rate to help their customers get caught up. If that is not possible, bankruptcy is often the best option. An experienced bankruptcy attorney can help determine if you qualify for bankruptcy and get your life back on track financially.
At The Benenati Law Firm, we have helped thousands of individuals and families eliminate their debt and get a fresh start financially. If you have any questions on this topic or are struggling with overwhelming debt, call Orlando bankruptcy attorney, Walter Benenati at 407-777-7777. Attorney Walter Benenati filed bankruptcy in 2008 and can empathize with what you are going through. Ask Walter how you can restart your life. The day you hire our firm, we will contact your creditors to stop the harassment and collection calls. We make our hours convenient for our clients and offer free consultations on Saturdays (9:00 a.m. – 3:00 p.m.) and throughout the week until 5:00 p.m. If you are in a financial crisis and considering filing for bankruptcy, contact an experienced Orlando bankruptcy attorney who can advise you of all of your options.