With the number of bankruptcy filings expected to climb into the 2 million range, there are many Americans that are attempting alternatives to bankruptcy before filing. There was recently an article in a major newspaper offering insight into the practices of debt settlement companies. Debt settlement companies, advertise themselves as an alternative to filing bankruptcy, using tag-lines like, "we have the secrets that the credit card companies don't want you to know." In fact, there is no secret used by the debt settlement companies to eliminate debt.
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How the debt settlement process typically works is, the debt settlement company directs the consumer to set up a special bank account to put all of their money in that they would normally be paying their creditors. Once the balances increase to a sufficient amount, the settlement company tries to negotiate a lump sum settlement with the creditors, attempting to reduce the debt by 50%. These programs usually last up to three years. This all sounds good, but the problem is, once the customer stops paying their payments the creditors get very upset. They send in the wolves to go after the debtors, using whatever means to collect on the debt. Many people in this situation end up getting sued by the creditor and getting a judgment filed against them. If the debtor is working, the creditor will pursue a wage garnishment. This all sounded so simple in the beginning. Most debtors feel that paying the creditor something is better than the nothing they would get if the debtor decided to file for bankruptcy.
One pathetic fact about debt settlement, according to industry figures, most debtors fail to finish the program. A recent survey found that two years after enrolling only 30% of the customers have either completed or were still saving to try and settle their accounts. The debt settlement company always gets paid up front before the creditors. Taking all this into consideration, it seems like a scam. Because of all the negative press, Congress and regulators are looking into banning upfront fees and capping the total fee that one of these services can charge. Once again filing bankruptcy is starting to sound pretty good.
If the debtor has a mountain of debt and no way to pay it, they should begin their search with the consultation from a bankruptcy lawyer. Most attorneys will give potential clients a free consultation. It doesn't mean that you have to file bankruptcy, but you should come out of the meeting being schooled on how bankruptcy works. Being educated about filing bankruptcy can be invaluable in helping others avoid it in the future, if it's not necessary now.
Using debt settlement is more of a niche market, for those looking for a simple solution to a small amount of debt. In no way would it work for an individual that has $100,000 in credit card debt, when making only $60,000 a year. In this circumstance, it's a no-brainer that this individual should file bankruptcy under Chapter 7. When searching for the answers to your debt problems always start by having a bankruptcy lawyer evaluate your situation. Getting into the right program for the amount of debt owed and the amount of income a debtor makes will alleviate a lot of stress.
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