Should I sign up for a debt settlement program?

As an Asheville bankruptcy attorney, I’ve never met a potential client who wanted to file a bankruptcy case.  Most people will do just about anything they can to avoid filing.  Many times a consumer’s misguided notion about the bankruptcy process leads them to fall prey to expensive bankruptcy alternatives which make a consumer’s situation worse, not better.

Speak with a bankruptcy attorney before signing up for a debt relief program.

Speak with a bankruptcy attorney before signing up for a debt relief program.

Is debt settlement a good option?

If you are in financial trouble, you have likely seen the television commercials or internet ads for “debt settlement” programs that “get you out of debt.”  Many of those companies ask that you start sending reduced payments to them, rather than your creditors.  This sounds great to a stressed out consumer because the debt relief company promises payments reduced by 50% or more, and seemingly offers a way out of the financial crisis. The problem with this approach is that many of these debt settlement companies spend the majority of their budgets on sales rather than debt relief.  Creditors can still sue for a money judgment, and try to collect from the consumer on that money judgment.  The debt settlement program does nothing to stop the state court collection process.  Here’s an example of the type of program I’m talking about:

Example #1:  A recent client had been paying $670/month for a year to a debt settlement company to deal with his $35,000 credit card debt.  He had two more years to go in order to complete the settlement program.  Outside the program, minimum payments were roughly $1100/month, and it seemed like a good deal.  Then the sheriff served him with a collection lawsuit on the debt he thought he was paying off, so he called my office for a consultation.  The consumer was qualified to file a Chapter 7 bankruptcy case which ended all liability on the $35,000 debt without anymore payments to the creditors.  He saved 2 years and roughly $16,000 by filing for Chapter 7, and he now has a court order demonstrating he was no longer legally responsible for payment.

Lump sum settlements

The second type of settlement relief I see in my office stem from collection attempts.  A debt collector will explain that the original creditor is willing to accept less than the amount owed for a lump sum payment.  Many times, the amount the creditor is willing to accept is only a fraction of the entire amount owed.

Example #2:  A consumer scheduled an initial consultation to discuss the offer she received in the mail on a credit card she had been struggling to keep up with and in fact hadn’t paid on in over a year.  She had been ignoring their daily collection calls.  The offer said that she could pay $3,500 to settle a credit card debt of $12,000.  Instead, she eliminated the entire debt, along with all her other unsecured debt, by filing for bankruptcy relief.

Why would a creditor agree to a lower amount?

Creditors typically are willing to accept a lower amount from a consumer because the creditor believes the debt in question is uncollectible under North Carolina law.  Our exemption laws protect much of a consumer’s property from seizure.  However, the debt collection companies/collectors cannot provide legal advice to consumers.  This fact makes it very important for consumers to seek professional advice about the specifics of their own situation prior to sending money to a third party to settle a debt.

Bankruptcy alternatives usually cost too much

In my view, the negative stigma associated with bankruptcy has been intentionally created and paid for by creditors (largely big banks) who stand to profit if consumers forego their right to file a case.  Many times, I spend time with consumers showing them the real costs of their various debt relief options.  Bankruptcy is frequently the least expensive, most simple, and least time consuming available to fix a failing budget.  It frequently leads to better credit ratings for consumers as compared to the alternatives too.  The best local debt settlement resource we have in Western North Carolina is OnTrack Financial.  OnTrack is a local, non-profit, low cost service provider who has been helpful to many consumers when bankruptcy is not the right answer for their situation.

Bankruptcy is a simple legal process which determines if a creditor has legal authority to pursue a valid debt from a consumer, and frequently ends the collection process through a discharge of debts.  For those of you in Western North Carolina, I’d be pleased to speak with you about both bankruptcy and non-bankruptcy alternatives during a free, initial bankruptcy consultation.