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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

Why Debt Consolidation is a Bad Idea (or Worse, a Scam)

[fa icon="clock-o"] April 26, 2017 [fa icon="user"] David L. Stevens [fa icon="folder-open'] Bankruptcy, Debt Management

bills past dueThere is a huge stigma that goes along with filing for bankruptcy.  The word bankruptcy invokes a feeling of failure and immorality. People dread the thought that bankruptcy may be in their future.  But debt consolidation, debt resolution, credit management, debt relief, etc.; these terms invoke a completely different emotional response.  These concepts are marketed as an alternative to bankruptcy: a way out of financial hardship, but not shirking one’s responsibilities. 

Don’t be The Next Victim

Debt relief agencies are great at marketing, but are a poor choice in most circumstances.  Debt relief agencies promote that their services are an alternative to bankruptcy, but in truth they are praying on people’s emotions, spouting a false narrative, and creating false expectations.

Congress created the bankruptcy laws to balance the need to give reprieve to the honest but unfortunate debtor, along with the rights of creditors to obtain a fair recovery.  Filing for bankruptcy is not taking unfair advantage of creditors, or a sign that one is a “deadbeat”.  Good people find themselves in unfortunate circumstances, and filing for bankruptcy is simply using the tools Congress has carefully crafted to balance the equities between creditors and debtors.

Generally, a debt relief agency will require a contract to be signed in which one promises to make periodic payments to the agency.  The concept that is sold is that a fund will be created to help settle your accounts.  The agency will tell you some story so that you feel good about sending it money every month.  They will come up with some clever name for the “special account” and make you feel like you are taking a proactive step in setting yourself on the right track again.  The agency will collect your money, subtract their fees, and then try to settle your debts for less. 

Well, that may sound great, but the truth is a debt resolution company can’t stop creditors from reporting delinquencies on your credit report. It doesn’t prevent creditors from commencing civil law suits, from garnishing wages, levying bank accounts, or even force a creditor to take less than it is owed.  That is the simple truth. 

Debt Settlement is Better for Your Credit?

Don’t believe it.  Creditors will continue to report late accounts. Collection agencies will start buying the debt and report the debt as a collection account and the original lender will report the debt as a charge-off (a double hit to your credit). Civil judgments will result after the creditor files suit to which there is no defense. And all this will continue until the debts are finally paid. 

Does Bankruptcy Affect Your Credit?

Of course it does.  But it is not as dramatic as most people think.  The filing for bankruptcy doesn’t have the same impact to one’s credit as it once did.  Moreover, a bankruptcy will appear once on the credit report and then all debts will thereafter state “included in bankruptcy”.  That’s it…damage done.  Now the process of reestablishing your credit can begin.  A chapter 7 debtor will start getting offers for credit cards right away (high rates and poor terms, but it is available).  Most mortgage underwriting guidelines require two years from bankruptcy to qualify for a mortgage loan and some programs require as little as one year of chapter 13 payments.  A bankruptcy is filed and a fresh start is commenced.

I am a bankruptcy attorney so some may say that my opinion of so-called debt relief agencies is prejudiced.  But I feel passionate about what I do and hate to see people taken advantage of by these wolves in sheep’s clothing.  I have had hundreds of clients that have come to me after first using one of these services and I can honestly say that I have never heard of one success story.  Paying some agency to hold your money while your credit is ruined, and lawsuits rain down, all the while the amount owed to creditors increasing because of default interest, penalties, and attorney fees, is just not a wise decision.

Bankruptcy Provides Legal Protections

Only bankruptcy can provide the legal protections necessary to keep creditors at bay and provide the tools to effectuate a fresh start.  The bankruptcy process is a well-oiled machine, designed by Congress to treat creditors and debtors fairly.  Don’t let the marketing fool you. Don’t equate bankruptcy with failure.  Use the tools that our legal system has provided just the same as any good business owner would (think Trump), then focus on the future with a clean slate. 

If you have questions about your options and want to see if bankruptcy is a good choice for you, I am always happy to meet for a free consultation.  Maybe bankruptcy is not the best option, but let your decision be based on the facts and the law, not marketing and false narratives.

Schedule a Free Bankruptcy Consultation Today!

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