I have had a longstanding grudge with debt relief/debt settlement companies. I first learned about them through my Pennsylvania bankruptcy law firm. When meeting with clients, the horror stories are frightening.:
Client X pays a debt settlement firm over $6,000 in 13 months, yet has only reduced her credit card debt by $300. Client Z is in the hole $10,000 in 2009, signs up for debt relief from one of the companies that advertises on KYW 1060, and in 2010 he has $13,000 in debt (while stopping his use of the credit cards in 2008) and has forked over $2500 to the “relief” company. Both clients come meet with me and I have eliminated their debts in about 3 months and have stopped all harassing phone calls. They are angry they ever got suckered into trying “debt relief”.
These companies, as pointed out in today’s New York Times, are generally worthless. To start, their fee model is outrageous,
The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced.
Most of these customers, would have been better off filing for bankruptcy. You see, in bankruptcy, your debts are (actually) discharged and the fees (average Chapter 7 is around $1100-1200) are much more reasonable. There is an end to bankruptcy and you can get a fresh start. As the example in the New York Times illustrated (my emphasis added),
In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program. By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.
Here’s what the companies don’t tell you: the credit card companies don’t have to agree to anything the debt relief agencies propose. So, the companies can send letters and make phone calls (if they even go that far) and propose more favorable payment terms. But, Visa/Mastercard/etc. will rarely lift a finger. These same credit card companies do, however, have to abide by the U.S. Bankruptcy Code when a person files for bankruptcy. Moreover, the relief agencies will pretend like they will preserve your credit when, in reality, your credit is probably already poor.
These companies play on American’s pride to resolve their own debts and take responsibility for their actions. Yet, it is a ruse 90% of the time. The widow, the sick, the unemployed father of 4, and the injured have a snowball’s chance of climbing out of debt when the credit card companies are jacking up their rates and preventing them from climbing out. Bankruptcy and the law behind it gives people a fresh start without the mess and the ultimate disappointment that the relief agencies peddle.
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