You may have seen advertisements from companies claiming to offer debt relief by “settling your debt,” “consolidating your loans and settling your accounts” or other similar phrase. These programs are not the services of bankruptcy attorneys, and they are not covered under the Bankruptcy Rules. Since these kind of services operate outside the Bankruptcy Rules, they come with significant risks:
- No automatic stay to protect you
- No obligation from your creditors to participate in the settlement plan
- No attorney representing you in most situations
- You can still be sued by creditors
- You’re paying the company for a service that may never benefit you
The single biggest risk of working with a debt settlement or loan consolidation company is the fact that hiring one of these companies does absolutely nothing to change the legal rights of you or your creditors. On the other hand, filing bankruptcy automatically protects you from collection actions by your creditors. The legal mechanism that instantly limits creditors’ rights when you file bankruptcy is called the automatic stay. The automatic stay does not exist for debt settlement or loan consolidation. Since those individuals are not protected by the automatic stay, they remain vulnerable to collection efforts, including lawsuits.
If you file bankruptcy, your credit card company cannot sue you.
If you are in a loan consolidation or debt settlement program, your credit card company can decline to participate and, instead, choose to sue you on a past-due debt.
Another risk of working with a debt settlement company is that you may not have an attorney looking out for your interests. Often times, the companies that offer these debt settlement services do not even employ attorneys. As a result, you could pay for a service that lacks professional legal knowledge and guidance, or worse. If you hire an attorney to file a bankruptcy petition, you will have a trained legal professional advocating for your best interest from start to finish.
Debt settlement or loan consolidation may cause you to default on your accounts.
If you are current on your payments and you employ a debt settlement company to attempt to negotiate the settlement of your accounts, this activity could result in late or missed payments that could cause creditors to act more aggressively. Of course, even though your debt accounts may not be improving, you will be paying for the debt settlement company’s services the whole time!
I have seen dozens of clients that tried to recover from debt by employing a debt settlement or loan consolidation company. Each one regretted the decision – including time and money wasted because they got little or no result, and they ended up having to file bankruptcy anyway. Often times, those clients had spent more money on the debt settlement service than they would have paid for a bankruptcy. If you are considering using a debt settlement company, you should strongly consider meeting with a bankruptcy attorney. Hiring a bankruptcy attorney, rather than employing a debt settlement service, will give you confidence that the money you spend will actually give you the debt relief you seek.
