September 24, 2017

Debt Resolution Programs: Beware, Beware

Look, I know why people have joined or are considering joining so-called “debt resolution” programs; we humans have an innate desire to “do the right thing” and honor our debts. But with so many people turning to me to pick up the pieces of a debt resolution program gone bad, it’s time to take a stand against them.

The ugly downside of debt arbitration programs

As I work with new clients in bankruptcy counseling sessions, they often tell me how an online search led them to an out-of-state company offering “debt resolution programs” (also known as debt settlement, debt negotiation, or debt arbitration). These programs promise to negotiate on the debtors’ behalf to settle unsecured debts (typically, credit card and medical debt) for less than full value, in exchange for a lump sum payment with payments over a period of time for substantially less than what is owed. At the end of the payment period the remaining debt is forgiven.

The debt resolution provider promises payment plans that they assure the creditors will accept. There will be no law suits or further collection efforts. They claim to be able to manage the creditors and help the debtor avoid the “stigma of bankruptcy.”

As a matter of fact, many if not most of these companies are selling scams. They have no intention of doing anything more than collecting the debtors’ money and pocketing the cash. Some will make an effort at a payment plan; however, creditor participation is entirely voluntary. Thus, it is almost impossible to get all creditors to agree. In short, almost if not all of these plans fail. In addition, generally nothing is said about taxes that arise when creditors forgive debts.

Trying to do the right thing is a noble sentiment; however, the practical reality is that debt resolution plans are a “crap shoot”; while bankruptcy protection is under federal law. Many debtors qualify for Chapter 7 bankruptcy with no payments to their unsecured creditors. All of their credit card and medical debt is dischargeable. With bankruptcy, many debtors can keep their house and cars in a Chapter 7 bankruptcy case, if they want to continue making the payments; if they don’t, then those debts will be discharged as well (and the property surrendered to their lenders).  They will pay an attorney’s fee and a filing fee for their Chapter 7 case, the total of which will be much less than 10% of the payments required debt resolution programs.

Debt resolution gone wrong

I have met with many new clients who have been in debt resolution programs. Invariably they will tell me a tale of woe about spending thousands or tens of thousands of dollars only to be left high and dry by their debt resolution provider. Debt providers answer to the client’s question, “Why can’t you do something for me?” by saying “We have done all that we can do” or not responding at all to the telephone call.

If you have considered a debt resolution program, please talk to a good, experienced bankruptcy attorney before walking down that costly road.