Beware of Debt Settlement Companies and Debt Relief Agencies

I am a bankruptcy lawyer, and have had many people come to me after dealing unsuccessfully with debt settlement/debt relief companies. Many of them have spent thousands of dollars in a futile attempt to pay their debts, only to be subjected to creditor harassment and seeing no result for all their efforts.

There are some reputable debt settlement agencies, such as Consumer Credit Counseling Service, which has been around for decades. CCCS charges a nominal fee to restructure credit card debt, and they can be very helpful for some people. Since credit counseling is required before a person can file bankruptcy, there are other consumer credit counseling organizations all over the country that have been approved by the Federal Courts to provide such credit counseling. A list of those agencies can be found on the website for the Federal Court in your jurisdiction. But unfortunately, when the economy tanks the way it has now, scam artists come out of the woodwork and begin conning honest people.

The reality is that despite their inflated promises, debt settlement companies can't do anything for you that you can't do for yourself. Call your creditors, request that they lower your interest rate or work out a reduced payment plan for you. This will probably require you to close the account and pay off the balance. You may be able to come to an agreement whereby they will not make any adverse notation on your credit report, but that is unlikely. And any amount of your balance that is written off will be reported as income to the IRS, which means you will have to pay taxes on it. But it may give you the breathing room you need to get back on your feet.

Many debt relief companies tell you to stop paying your credit cards and to send them money to build up a fund so they can then offer the creditors a lump sum payoff. The problem is that the fees charged by the company come out of the first money you give them, and only after the fees are paid does your money begin to build up for settlement offers. In the meantime, your credit card lenders begin calling you, harassing you, and reporting delinquent payments on your credit report. Only after the account has gone to a collection agency do the debt relief companies begin trying to cut a deal.

You can do the same thing, without paying any fees to a debt relief company. No matter which of these tactics you use, your credit rating is going to plummet. And the credit card lenders are under no obligation to work with debt relief companies or with you. Even if some of your lenders do agree to a settlement, that is not particularly helpful if others will not. Meanwhile, your credit is ruined for seven years.

There have been so many consumer complaints recently about debt relief companies that the Federal Trade Commission is proposing rules that will severely restrict those companies' practices. Under the new rules, debt settlement companies will not be able to charge fees until they can confirm that a particular debt has been settled, reduced, renegotiated, or otherwise altered.

If you are unable to pay your credit card debt, are in danger of losing your home or cars, or cannot pay your bills and still afford essentials, you should consult a bankruptcy lawyer. Most will give you a free consultation, and will educate you about your options. I have consulted with many people who had options other than bankruptcy, and simply needed to know what their rights were. However, when bankruptcy is the right option, it can give you a fresh start, protect your assets, and stop your creditors from harassing you.

Many people fear filing for bankruptcy because they are afraid of losing their property, ruining their credit rating forever, or being stigmatized. For the full story, go to the websites for the National Association of Consumer Advocates or the National Association of Consumer Bankruptcy Attorneys. Once you know what your legals rights are, you will be able to make an informed decision about what is best for you and your family's financial future.