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Why Debt Settlement May Not Be Your Best Option

We’ve all heard the bold promises made by various debt settlement companies. “Cut your debt in half!” “Be debt free in 36 months!” These companies pitch their wares to unsuspecting customers who want to reduce their debt and pay “only a fraction” of what they owe. While not necessarily selling snake oil, these settlement companies often leave debtors worse off than they were before.

A recently published report by Center for Responsible Lending showed that debt settlement is not always worth the risk for debtors. They may be better off holding onto their debt and making minimum payments, or filing for bankruptcy. Debt settlement may seem like a dream scenario, but there’s a catch most companies conveniently leave out.

Clients must first default on all of their debts before they can be eligible for a debt settlement.

The money they would be using to slowly pay down their credit cards would be redirected to a side fund that would eventually be used to pay a settlement. (That is, of course, if your creditors agree to negotiate with your debt settlement company.)

In the meantime, you just keep defaulting, sinking further and further into debt and face the threat of being sued. With each and every default, your credit rating takes a hit.

In 2010, the Federal Trade Commission restricted debt settlement companies from charging any fees to clients until they had settled at least one debt. Even though this provision certainly improved the landscape, the CRL report indicates that more needs to be done. The CRL found that in order for the reward to outweigh the risk, debt settlement companies would have to settle anywhere from 67 percent to 80 percent of a client’s total debt.

Things don’t always work out so well for people in need of a debt settlement. In 2010, the FTC reported that over 42 percent of debt settlement clients end up not having a single debt settled. There are some who have their debts settled, but it is clearly a roll of the dice which could end up setting you back instead of moving forward.

Those struggling with unmanageable debt should consider filing for Chapter 13 or Chapter 7 bankruptcy protection. First, as soon as you file, an “automatic stay” prohibits your creditors from harassing you about the debt. Second, if your bankruptcy gets approved by a judge, your creditors can’t sue you over defaulted loans. Learn more about how bankruptcy can help you.

Contact the Law Office of Joel R. Spivack today to discuss your finances and bankruptcy options. He has been helping New Jersey and Pennsylvania residents get back on track financially for over 25 years.