Considering Debt Settlement?

Perhaps Bankruptcy Is Cheaper And More Efficient.

Often people come to see me who have been working with a debt settlement company but are unable to manage the payments to the debt settlement company or get discouraged with the whole process. How can bankruptcy be better?

To be clear, a debt settlement company is an entity that will take your money in monthly installments and builds up a sum that will be used to settle your debts. Once that sum is built up, the debt settlement company will then make a lump sum offer to your creditors for payment in full satisfaction of their claim. For this “service,” the debt settlement company charges a fee which is typically a significant percentage of the total debt.

For example, if you have three credit cards totaling $25,000.00 in unsecured debt, the debt settlement company will say that they can settle the accounts for $15,000.00 (approximately 60%) and will charge a fee of $3,750.00 which is 15% of the total debt. Thus, your total payment to settle $25,000.00 in credit card debt is $18,750.00 ($15,000 paid to creditors and the fee of $3,750.00). In order to have this money available to make the “settlement offer,” you pay in approximately $800 a month for 24 months (of course, this may vary among companies). Generally, the debt settlement companies want your accounts to go into “charge off” status.

So what happens if one of your creditors with whom you wish to settle refuses the settlement? You are still obligated on the debt. Just because a debt settlement company says that they can settle your debts, that does not mean that the creditor will actually accept the offer. So, in the above example, if one of the creditors does not settle, you still must pay that creditor or seek some other alternative. In bankruptcy, the creditors are required by law to accept your ‘offer’.

Another issue concerns your credit rating while you are paying the debt settlement company each month building up your “settlement funds.” Your credit rating or score goes down the tubes. Your score is dependent on your paying your bills on time. If you do not – for example when you pay through a debt settlement company — your score goes down. So, assuming that you do settle with your creditors through a debt settlement company, your credit score is still trashed.