Why Not Use Debt Settlement or a Debt Management Company?
Bankruptcy. While we know it is not a bad word, you may not realize that yet and are looking for alternatives. Isn’t there something else you can do? Sometimes yes, sometimes no. But, the key is making sure you understand the different options and use common sense in exploring and addressing those options.
We know having to address this situation makes your stomach hurt and your hands sweaty. But, talking to someone local who understands all aspects of the troubles you face and can give you specific advice is really important. You need to consider all your legal alternatives available so that you can decide which will benefit you the best. We have included information below about why we think bankruptcy is usually a better solution than debt management or settlement. Please take the time to reveiw this and then read about Chapter 7 and Chapter 13 bankruptcies under the links to those pages. (Links are under Bankruptcy info heading above.) Then, come see us and review your personal situation for the best remedy.
DEBT SETTLEMENT COMPANIES
We will admit we are biased against debt settlement companies. We’ve just seen too many good people lose thousands of dollars to these companies. But, you need to know what they are and how they work.
A debt settlement company’s goal is to collect funds from you every month until it has saved enough to settlement for pennies on the dollar with your creditors. If you only have one or two creditors, this may work fine. (Although in our opinion, you can do that yourself without paying an outside company.) The problem with the vast majority of these companies is that they simply don’t work in the long run. They are negotiating with the creditors and asking creditors to not take collection activity on their promise that one day they will collect enough funds to pay a portion of the debt.
But this is all voluntary and there is no force of law behind it. If one creditor — just one – declines to participate, the whole program goes down the drain. And it usually takes all the money you have paid with it. We see this all of the time. Folks have paid thousands of dollars to these companies, and then they get hit with a lawsuit or garnishment from one creditor who did not agree to participate. All of a sudden, they cannot afford the payment anymore and have to see us anyway.
Why? Most folks think that debt settlement is better than bankruptcy on their credit report. But, debt settlement shows negatively on your credit report and can remain on there for up to 7 years. Bankruptcy is on your credit report for 7 to 10 years, but (and this is the important part) you start rebuilding right away no matter if you are in a Chapter 7 or 13. With debt settlement, it usually takes years to settle the various debts, delaying the rebuilding process.
DEBT MANGEMENT COMPANIES
Debt management companies seek to reduce interest and restructure your payments to creditors over three to five years usually paying back 100% of your debts. What you pay is based on the amount of debt – not on your ability to pay. For some folks, these companies work fine. But if the debt management payment makes you unable to provide for the necessities of life, then you need to re-evaluate your plan and look at bankruptcy. A debt management plan is normally as damaging on your credit as bankruptcy as most lenders will continue to report you as late on payments which continues to harm you until the debt is paid off.
If you look at using a debt management company instead of bankruptcy, it is very important to understand the differences and use a local non-profit debt management company. Be careful: there are many dishonest debt management companies that charge high fees and provide little value. Don’t send your hard-earned money to someone in another state or county with the idea they will pay your creditors. You need someone you can sit down with and evaluate your income, your expenses, and that is accountable for the funds you pay into the plan. I often suggest some clients visit Consumer Credit Counseling in Roanoke before deciding to file bankruptcy so they fully understand their different options if I think credit counseling is an option.
You can also visit the Federal Trade Commission’s website on coping with debt to see their warnings about debt settlement and management companies and how to evaluate them: http://www.consumer.ftc.gov/articles/0150-coping-debt#use