An excerpt from Bankruptcy: A New Beginning by Seth Hanson
In addition to debt consolidation, many people experiencing financial hardship try to resolve their problems using debt settlement. In debt settlement, a debtor, or someone hired by the debtor, attempts to negotiate a reduced payment on each debt, one by one. In the right situation this can be an effective tool to resolving your debt. Usually, that situation involves having access to a large sum of money that can be used to pay a creditor one big payment to settle the debt at a discount. As a general rule, the more money you can pay in one payment, the greater discount the creditor will give you.
Several problems can arise in debt settlement, however. To begin with, most people in financial trouble don’t have access to a large sum of money. This alone stops most people from succeeding with debt settlement.
You might wonder why your creditors won’t agree to take smaller payments over a prolonged period? Something is better than nothing, right? To answer this question, you have to put yourself in your creditor’s mindset. From your creditor’s point of view, why should it agree to accept less than you owe if you are going to make payments bit by bit, drop by drop. The creditor can always obtain a judgment against you, and if you are employed, garnish up to 25% of your wages. The judgment creditor can also seek to levy your bank account once it obtains a judgment. And once it gets a judgment against you, it can continue renewing the judgment until it is fully satisfied or you die.
Another problem with debt settlement arises when people hire debt settlement companies that have unscrupulous practices. These practices were described in a New York Times article “Peddling Relief, Firms Put Debtors in Deeper Hole.” According to the New York Times, debt settlement companies typically direct their clients to skip their payments to creditors and instead make payments to build a stock-pile of cash with which to settle the debts.
Andrew G. Pizor, a staff lawyer at the National Consumer Law Center, said, “What they don’t tell their customers is when you stop sending the money, creditors get angry. Collection agents call. Sometimes they sue. People think they’re settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit.” The debt settlement industry’s own data show that customers who try debt settlement typically fail to succeed.
“The industry is designed almost as a Ponzi scheme,” said Scott Johnson, chief executive of US Debt Resolve. He continues, “Consumers come into these programs and pay thousands of dollars and then nothing happens. What they constantly have to have is more consumers coming into the program to come up with the money for more marketing.” Adding to this disturbing news, Gregory D. Kutz, managing director of forensic audits and special investigations at the United State Government Accountability Office, testified before the Senate Commerce Committee about the results of undercover investigations conducted by his office. “The vast majority of [debt settlement] companies provided fraudulent and deceptive information.” The New York Times article summed up as follows: “State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises. Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.”
All that said, debt settlement can work wonderfully in the right situation. In fact, I have helped a handful of clients settle their debts. I always suggest they do so themselves, though, so they don’t have to pay my fees. It is only after they insist I help them that I have agreed to do so. It is a rare case where debt settlement will work. It is typically a situation where a client had been planning to file bankruptcy and came into some money, usually by an inheritance.
On the other hand, there have been far more people who have come back to me a year or more after trying debt settlement as a way of trying to avoid bankruptcy. These people have universally regretted doing debt settlement because it did not work out and they ended up filing bankruptcy anyway. They have also wasted a year or more of time and thousands of dollars in a failed debt settlement program.
For more information contact your Yuba City bankruptcy attorney.
Categorized in: Debt