It's an unfortunate reality that when the economic times get tough, shady businesses come out of the woodwork offering unrealistic hopes for debtors to "settle their debts for pennies on the dollar". It's no wonder that so many of these debt settlement companies are being sued by states like Illinois and Minnesota for fraudulent business practices and deceptive marketing tactics.
Reality of Debt Settlement
While debt settlement on it's own is not an inherently dangerous tactic, the companies that offer the service are often deceptive in their promises to consumers and force upon them many hidden fees and costs that end up getting people into more trouble rather than helping them out.
Debt settlement is essentially a means of negotiating debts owed in hopes of getting a creditor to accept less than what is owed in return for removing their claim. The hard part is no creditor wants to accept less than what they are owed, especially when there are several creditors involved, which is almost always the case. Anyone can negotiate their own debts just as effectively as these companies, and without the outrageous fees.
Alternatively, some debt settlement, or "debt consolidation" companies will tell debtors to stop paying their creditors all together, and instead pay them. Sounds like trouble right? It is. Unfortunately that is exactly what many Americans have been duped into doing, hoping that the debt settlement companies promises of removing debt in months are genuine.
They claim to collect this money in a trust fund, until enough money has been saved to offer creditors a lump sum to get rid of the debt. All the while, while this company collects the money, the creditors go unpaid and the debtor has to deal with harassing phone calls, letters and lawsuits. Meanwhile, the debt settlement company is taking a nice portion of the mothly payment for themselves.
The End Result
Many Americans have recently found out, the hard way, that most of these debt settlement companies do not deliver what they promise. The great majority of people who sign up for a debt settlement program end up owing more than they did to begin with, and now they are dealing with lawsuits from their creditors.
Settling Your Own Debts
If debt settlement is an option, you should be able to do it on your own, especially when dealing with debt collection companies. The trick is to know when to accept a settlement offer. In general, the first few offers will be a suckers bet. Most debt collection companies will end up accepting between 35-40% of what is owed, so start around 30% and go from there.
Another tip is, make sure you can actually pay what you are offering, in one lump sum. Without the finds, negotiations go out the window.
What About Bankruptcy?
Bankruptcy is a whole different animal. Because bankruptcy proceedings are overseen by the US Bankruptcy Court, there is no need for people to worry about being cheated out of their money or ending up worse of than they were. Now, that’s not to say that bankruptcy is a walk in the park, but in the right situations, bankruptcy can offer tremendous help for honest people that have become insolvent.
Bankruptcy law offers debtors a few options to deal with an overwhelming amount of debt. Most commonly, individuals will file bankruptcy under chapter 7 or chapter 13 of the bankruptcy code. Chapter 7 is generally best for people who have very little or no income, and offers to eliminate all debts. However, the bankruptcy court may liquidate some property to repay creditors. For most people, the liquidation is not a problem unless there is personal property of very high value at stake.
Chapter 13, on the other hand, is better suited for individuals who do have some steady income, but not enough to repay debts and maintain there standard of living. Chapter 13 involves creating a repayment plan, based on available income, designed to repay debts over three to five years.
Who Should File Bankruptcy?
Filing for bankruptcy protection is not without it's downsides. The bankruptcy will stay on your record for seven to ten years, and lower your credit score by over 50 points. However, for most people considering bankruptcy, credit scores are less of a concern than keeping their home and getting back on their feet. The reality is that bankruptcy is often less detrimental to someones credit score than dragging out payments and fighting with creditors and lawsuits.
Generally, bankruptcy is reserved for those people who have overextended themselves on credit, and have no realistic means of getting out of debt within three years. Usually, a job loss, reduced income or divorce will be the instigating factor in a bankruptcy petition.
Pre-Bankruptcy Counseling: A Good First Step
Anyone considering debt settlement or negotiation options, or bankruptcy would be well served to attend the one to two hour pre-bankruptcy counseling session. The main purpose of this court mandated course is to help debtors figure out is they can afford to repay debts without filing bankruptcy. While some people may find that the session shows that they should be able to repay the debts, it is important to be confident. More than half of people that begin a repayment plan after pre-bankruptcy counseling end up filing for bankruptcy anyway, meaning they repaid a lot of unnecessary debt.
To get genuine advice regarding the best options for dealing with overwhelming debt, talk to several local bankruptcy lawyers and see what each one says. An honest bankruptcy attorney should offer alternative strategies other than just filing for bankruptcy, and will be able to give you real legal and financial advice regarding your options.
