It seems like there are always new debt “solution” trends every day. Just in the last several years we have seen the emergence of products like credit counseling and debt settlement that promise to reduce your debt within a certain amount of time without having to ever file bankruptcy. These services are typically provided by financial companies that require you to put an amount of money into a new account every month and when the time is right they will negotiate with your creditors to hopefully pay them off. So is debt settlement a better solution to filing bankruptcy? Here’s my take on why I think the answer is NO.
1. No legal requirements for creditors to comply
A debt settlement is ultimately when a debtor pays a company to negotiate with their creditors on their behalf with the hope of reducing their overall balance. The key is the negotiators can only “hope” that the creditors agree to reduce the debt, there is no requirement for them to do so. On the other hand, if a debtor files a Chapter 7 bankruptcy or a Chapter 13 bankruptcy and it is approved by the court the creditors are required to comply with the courts orders, whether it be to completely erase the debt, or accept a decreased payment.
2. Debt settlement typically takes longer
As I mentioned earlier typical debt settlement programs will set up a bank account for its customers and tell them a certain amount of money to put into it every month. Once the account reaches a specific amount the debt settlement company will then begin negotiations with creditors. What many customers do not realize at the beginning of this process is how long it will take to reach the specific amount that is required for negotiations to start. In some cases it can take anywhere from 6 months to 2 years for the account to be large enough to meet the requirements. A quick chapter 7 bankruptcy can be done in 5-9 months.
3. No protection from creditor harassment
In the weeks and months that a debtor spends depositing money into their debt settlement account they will most likely still be receiving creditor phone calls, letters, and general demands for payment. In most cases there is no protection that debt settlement companies can give for this. That means that creditors can take a debtor to court even though they are involved in a debt settlement program. That is not the case with bankruptcy. The day your bankruptcy is filed with the court is the last time a creditor can legally contact you.
Ultimately the only person that knows what’s right for your situation is you. Consult with friends, family, bankruptcy attorneys, and even debt settlement companies before making a final decision. Just remember that there are options everywhere and you are not alone in this struggle: people just like you are having to decide what to do about their debt problem.