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Debt Settlement Agencies Offer to Help, But with Pitfalls

As I have said in many a post, and as has been my experience in my bankruptcy practice over the past 20 years, no one actually wants to file bankruptcy.  In trying to avoid it, they make all sorts of mistakes, like raiding their pensions.

However, another mistake they make is often the use of debt settlement agencies to negotiate deals with creditors to pay settlement amounts.  These agencies have recently come under fire, and my experiences with them, based on client feedback, have not been good.  Thus, I would admonish anyone thinking about using them to proceed with caution.

Telling You Not to Pay Your Creditors is Not Good Advice

The problem with these companies is their approach to settling your debt with creditors.  Far too many of them tell you to stop paying on your credit cards and, instead, make a monthly payment to them.

Their plan is that this money will amass in their coffers and, after a significant sum of money has accumulated, less their fees, of course, they will then use this money to negotiate lump sum settlements with creditors.  This, however, takes about two to three years.

The big problem is that the creditors get cranky when they aren't paid, and in that same two to three year period, lawsuits are brought, judgments are entered, wages are garnished, and bank accounts are levied upon.   When this happens, many of these companies wash their hands of the problem.  They also deduct their fees, whether or not they are successful in their negotiations with creditors!

Low Success Rate

As you can imagine, all of this does not lead to a very high success rate.  As reported on the New York Times web site on June 19, 2010,

"In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.

The industry's own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements."

Why Do It?

One obvious question is: with these pitfalls and a low success rate, why would anyone choose to retain the services of these companies?  The answer is, misleading marketing.  This practice has drawn the attention of the federal government.  The same Times article reports:

"In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a "national debt relief stimulus plan." Several claimed that 85 to 100 percent of their customers completed their programs.

"The vast majority of companies provided fraudulent and deceptive information," said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing."

I am not saying that all companies are like these under investigation.  However, it does make me very skeptical of the efficacy of retaining their services if they show a 66% failure rate while debtors still end up paying for the service.

So What Should I Do?

My advice is this: Contact all of your creditors and discuss with them a three year repayment plan. Find out how much the monthly payment would be and add them all together. If you can afford to pay off your debt in 36 months, then do it.

If you cannot afford a 36-month plan, then you should consider bankruptcy. Need help deciding? Then download my free book, Am I In Too Deep? A Guide to Knowing When You Need to File Bankruptcy in New Jersey for more information.

If you live in South Jersey and are considering filing bankruptcy, feel free to call my office at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case. If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

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