You hear them on the radio and TV, debt settlement companies claiming they can help you get out of debt and save money by negotiating with credit card companies to lower your interest rate and monthly payments. If it sounds too good to be true it’s because it is. What debt consolidation and debt settlement companies don’t bother to mention in their advertisements is the fact that they don’t have the legal power to force credit card companies to negotiate and they certainly don’t have the legal power to wipe out your debt. In some cases, debt consolidation companies purchase information from credit card companies regarding how much they are wiling to lower interest rates or settle a debt for. As a result, in certain cases negotiation never happens – the debt consolidation company already knows what the credit card company is willing to offer and simply charges you for the privilege of being your go-between.
Here, a debt consolidation company may charge you an “administrative” or “negotiation” fee. In some cases, these fees make up the total amount collected from you in the first 4 to 6 months of servicing your account – before any principle is even paid down on what you owe! In other cases, a debt consolidation company may ask you to set up an escrow account and pay them directly after you’ve cancelled your credit cards. They may make the minimum payment due until you’ve paid enough into the account to allow them to settlement your outstanding debt with a credit card company. As a result, you pay and pay month after month while they sit back and wait until you’ve paid enough to settle an account.
Why Bankruptcy is Cheaper
If you qualify for Chapter 7 bankruptcy your credit card debt, medical bills, personal loans, and other kinds of unsecured debt will be wiped clean. If you file under Chapter 13 you create your own repayment plan – subject to approval by the court – consolidating debt on credit cards, personal loans, and medical debt. Here, you – not the credit card companies – control the terms of your repayment plan.
Second, if the bankruptcy judge grants your bankruptcy, there is very little your creditors can do but accept the terms as determined by the court. Debt consolidation companies don’t have the legal power to force creditors to wipe debt clean or accept a repayment plan that makes the most sense for you.
Third, once you declare Chapter 7 or Chapter 13 bankruptcy, an automatic stay goes into effect, requiring your creditors and bank to halt all collections or foreclosure actions against you. Additionally, they have to stop calling and writing you. Practically speaking, that means no more nasty grams in the mail or unpleasant phone calls when you get home from work.
Lastly, there may be tax consequences of using a debt settlement company should they eventually settle your debt. In general, any balance that is settled over and above $600 is taxable. Depending on the amount of debt settled, you could be hit with hundreds if not thousands of dollars in taxes as a result.
Bankruptcy – Cheaper, Affective, Sanctioned by the Court
In the end, bankruptcy is cheaper and puts you in charge. And, while it may initially have a detrimental effect on your credit, it may actually be better in the long run than debt consolidation. Once your bankruptcy is approved, Equifax, Experian, and TransUnion are required to correctly report this on your credit. If a debt consolidation company waits months to clear your debts, your credit score will continue to be negatively effected as a result.