Can Debt Settlement Resolve My Debt Issues?
A question I get from time to time is “why should I file bankruptcy when I can pay $X dollars a month to a debt settlement company and resolve my debt problem.”
For a select few, debt settlement is a good option, however, the majority creditors would be better served with a Chapter 7 bankruptcy or a Chapter 13 bankruptcy than debt settlement, and here’s why:
With debt settlement your credit gets ruined. The debt settlement guys like to claim that you can avoid bankruptcy, but the reality is that once you’ve gone more than 90 days past due one that, you are treated by the credit bureaus as if you have filed bankruptcy anyway.
With bankruptcy your credit gets ruined too. Anyone who tells you bankruptcy will improve your credit is misleading you. There have been some occasions in my career working at bankruptcy actually improve somebody’s credit score, but bragging about raising a credit score from 490 to 510 is a little bit like the Mets bragging that they only lost by six runs instead of eight.
So if you’re going to demolish your credit (assuming you have any credit left), you might as well take the solution that will cost the least and have the best result, and in most instances that is bankruptcy.
Chapter 7 bankruptcy is what’s referred to by some as a clean sweep or fresh start bankruptcy. While there is some debts like student loans that cannot be a erased in a Chapter 7, most credit card debt and unsecured debt is discharged in Chapter 7 bankruptcy.
In debt settlement, you go to the bank hat in hand, normally after 6 to 8 months of not paying your creditor (and possibly getting sued), and ask them to take 50 to 60% of the debt to satisfy the debt in full. There are also some crooks out there who will say that all you need to do is type on the back of the check some magic words and the debt will be satisfied. While that used to be the case, most credit card agreements have been amended to cut out that trick.
In Chapter 7 bankruptcy, your case is handled by a bankruptcy trustee who is an expert in his or her field, and the banks are required to comply with the bankruptcy laws.
With debt settlement, you may be sending your money to a group of people who aren’t even attorneys or accountants, and recently there was a debt settlement agency that actually went bankrupt themselves.
Another Debt Settlement Company Goes Belly Up!
Going to a debt settlement company that has gone bankrupt itself seems akin to a shop teacher with no thumbs.
The fee for a straight Chapter 7 bankruptcy is $1600, which includes your credit counseling, credit reports, and filing fee. That may seem steep, but considering that most of my clients are saying goodbye to $10,000 or more in credit card debt, it’s not a bad deal.
The fee for debt settlement at most companies is 15% of the balance of the debt. So if you owe $15,000, the fee would be $2250. They also charge monthly processing fees. The debt settlement guys will try to suck you in with payments of $249.99 per month, but they are going to get their money long before they resolve your problems.
If you really want to do debt settlement because you’re fundamentally opposed to bankruptcy, I’m not going to stand in your way, in fact I can help you because I’m also a debt settlement attorney. As I said earlier, there are some clients that debt settlement works better for, and if after listening to my best advice you decide bankruptcy isn’t for you but you would like to try get settlement, I can do that.
The great advantage to bankruptcy is that the banks are forced to work with you, the grated managed to debt settlement is that it’s not bankruptcy. If you would like to discuss your personal situation call me at 484-661-2891 or e-mail me at Jim@padebt911.com to schedule your free no obligation conference.
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Comments
Thanks for the education on this Jim. I didn’t really know what the difference was, and I’m glad you made the clarification.
I’m going to go shoot this out on Twitter now. Take care and have an awesome day!
Thanks for the great article! I have spent over 16 years in financial services and you are right on track with this. Another point to ad is that most lenders would rather see a bankruptcy that numerous collection accounts that have been settled. It doesn’t always make sense, but I have worked for numerous banks and mortgage companies that had guidelines that allowed for bankruptcies but not settled debts.
Thanks again for the great information!
It actually does make sense in a perverse way, because you can only file bankruptcy every so often, so if you’ve just recently filed bankruptcy and gotten a discharge, a creditor is more likely to lend to you because they know you can’t get off the hook with Chapter 7 bankruptcy for another eight years.
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