LOS ANGELES BANKRUPTCY BLOG
Beware of Debt Settlement Scam
Nov 11, 2010
Weintraub & Selth, APC has helped hundreds of individuals and couples discharge millions of dollars of debt and obtain the "fresh start" bankruptcy provides. Unfortunately, many of these clients had already lost thousands of dollars in fees paid to a "debt settlement" company before they came to see us.
The advertisements on the radio and late night TV sound tempting: "The credit card companies don't want you to know that you have a right to settle your debt for 40, 30 or even 25 percent of what you owe" says one ad for a national debt settlement company. "Don't file bankruptcy when you can settle your debt" says another.
There have been many news reports about the misrepresentations made by the debt settlement companies, and the dangers to consumers. See for example:
http://www.msnbc.msn.com/id/31528382/
and
Yet people in trouble and being harassed by collection calls are desperate and stressed, and these advertisements sound tempting. But the only debt settlement plan that definitely works is when you have a lump sum to offer a credit card company to settle a past due account. Then, debt settlements in the 25-40% range are actually possible, and Weintraub & Selth can negotiate these for you. But obviously very few people who are having trouble making their credit card payments have the money to pay lump sum settlements of their debts, unless they borrow it from family members or their retirement account (which is something no one should ever do!).
The debt settlement companies claim that if you make monthly payments into their plan (after paying them a large up-front fee, or a percentage of each payment), they will save up your money in an account, and when there is enough to make a lump sum offer to one of your creditors, they will settle with your first creditor. Then the process is supposed to repeat until there is enough to settle with your second creditor, and so on. The debt settlement companies claim that they will tell all the creditors that you are registered with them in a debt settlement plan, and promise that the creditors will stop calling you. But this is just not true. Every creditor wants to be the first one paid, and the other collectors will keep calling you, and will probably eventually sue you, especially if your credit report shows you own a home or have steady employment. If the creditor gets a judgment against you, it can record a lien against your home and garnish your wages and bank accounts. Unlike a bankruptcy filing, the debt settlement companies can not do anything to stop this.
See:
http://www.smartmoney.com/spending/deals/debt-settlement-could-cost-more-than-you-think-21442/
The success rate of these debt settlement companies is extremely small. The attorneys at Weintraub & Selth talk to many clients who started one of these debt settlement programs with good intentions, and made payments for several months or even a year. But when they saw that most or all of their initial payments were going to fees to the debt settlement company, and when the collection calls and letters (and even lawsuits) kept coming, they realized that their problem wasn't going away, but was getting worse, and decided to consider bankruptcy as an option.
The bottom line is that anyone who is considering starting a debt settlement plan with a for-profit company should at least consult with a bankruptcy attorney to discuss their financial situation, and the advantages and costs of each option before they commit to pay any fees. For example, few people realize that the credit score of someone who files a Chapter 7 bankruptcy will almost always be higher after two years than someone who is involved in a multi-year debt settlement plan. Finally, bankruptcy stops all collection activity, including calls, letters and lawsuits.
