Debt Relief Companies and the Better Alternative (Chapter 13 BK)

When you find yourself in debt and start researching ways to get out of debt you may come across “debt relief,” “credit counseling” or “debt management” companies. It has been my observation that these companies charge significant fees and often don’t solve your debt problems. Annie Ugurlayan, the former chair of the consumer affairs committee of the New York City Bar Association says that often “the consumer ends up in a far worse situation.” In many cases you will end up being sued by your creditors even though you have “hired” a debt relief company.

These debt relief companies often claim they will negotiate with your credit card companies and settle for much less than you owe. This is not entirely false, but they cannot and will not make any promises that they will settle all of your debts and cannot and will not make any promises that they will settle for less than you owe for any given debt and they cannot and will not promise they will keep you out of any lawsuits. With so much insecurity and uncertainty, I am not sure where the RELIEF is??

The most egregious aspect to these debt relief companies is that they often collect their fees first. You will pay a monthly fee to these companies so they can “negotiate” with your creditors and pay off some of your debts…but the first months of fees often goes directly to these debt relief companies. So, by the time you realize these debt relief companies are ineffective and you want to change your mind, it often turns out that they have not paid any of your creditors (or very little), yet the debt relief companies has, in some instances, collected hundreds of dollars or more in fees.

Dave Ramsay, an American radio show host, author, and businessman and author of several books offering financial advice to consumers has this to say about debt relief companies: “Debt settlement is a scam, and any debt relief company that charges you before they actually settle or reduce your debt is in violation of the Federal Trade Commission. Avoid debt settlement companies at all costs.”

The good news is that there is an alternative called chapter 13 bankruptcy. If you don’t qualify to file chapter 7 bankruptcy (see our link on qualifying for chapter 7 bankruptcy here: https://www.lavellelawoffices.com/do-i-qualify-for-bankruptcy) you may be able to file a chapter 13 bankruptcy. A chapter 13 bankruptcy in many ways mimics a “debt relief plan,” but without the uncertainty and insecurity.

In a chapter 13 bankruptcy you will work with your attorney to create a payment plan for all of your creditors which will be submitted to the US Court. Perhaps the biggest benefit is that, after you file your chapter 13 case, you immediately get an “automatic stay.” With an automatic stay, no creditor can contact you/ask you for money without first getting the court’s permission (which most creditors do not do). The creditors must first go through the court and then through your attorney. In effect, a chapter 13 stops collection communication and creates a plan that you can afford to pay back your creditors. It is incredibly rare for a person to be sued while in an active chapter 13 bankruptcy.

The even better news is that the amount you are paying back to your creditors doesn’t necessarily depend on the amount you owe, but often it depends on your income and your expenses. Your attorney will work with you to create an affordable payment plan so that under a chapter 13 plan, you will often only pay back a small percentage of what you owe to your creditors and then, after a period of 5 years, the remaining amount you owe (with certain exceptions) will likely be discharged (eliminated). There are a few important qualifiers and rules you will need to discuss with your attorney, but generally a chapter 13 plan will provide you with all the “debt relief” of a debt relief plan but with more assurance (because it goes through the court) and certainty.

Here are some links for more information:

This site meticulously walks through the details of debt relief and bankruptcy. I don’t agree with the neutrality of the article, but, to be fair, it does cover the details well:
https://www.debt.org/bankruptcy/vs-debt-settlement/

This site explains the pitfalls of debt relief companies:
https://www.marketwatch.com/story/10-things-debt-settlement-companies-wont-tell-you-2016-07-19