Some Things You Probably Didn’t Know About Bankruptcy vs. Debt Consolidation
Most Americans take their responsibilities for repaying their debts very seriously. Despite U.S. bankruptcy laws that recognize the right to start over from the crushing burden of debt, many individuals and families will do everything they can to find a solution that will not include filing for bankruptcy. Unfortunately, many people only dig themselves into a deeper hole because they don’t fully understand the way debt consolidation services work.
Dept Settlement Companies
Some national for-profit companies offer to settle with your creditors for a reduced interest rate, reduction in late fees and penalties and even a reduction in the full amount owed. The amount they charge for their services will often be a percentage of the amount of debt they promise to negotiate off of your total debts owed. You will be asked to set up a “trust” account with the firm you choose, into which you will pay a monthly amount toward a predetermined dollar amount, often over a two- or three-year period. When your trust account reaches the specified level, the firm will contact your creditors and begin negotiating down to the level you have accumulated. Your creditors will be offered immediate payment from the trust account, so they often agree to the reduced amount.
Although unusual, in some instances over the course of your payment agreement with the company, you may still be responsible for all debts owed to your creditors. In other words, while you are paying hundreds of dollars each month into the trust account, your creditors are still free to pursue legal collections actions against you if you do not keep up with direct payments. It can also happen that, should you fail to meet your contractual payment obligations to the debt negotiation company, or decide to end the agreement early, the company may take its fee out of the amount accumulated in the trust account and you will be repaid only the remaining amount, plus interest.
Debt Consolidation Services
There are also many nonprofit organizations set up to help individuals and families consolidate their debts into a single monthly payment over a three- or five-year period. These companies pre-negotiate with all of your credit card creditors to determine a reduced amount owed. When they have negotiated a final figure, they determine a monthly payment plan and add a monthly charge for their services. The monthly payments over the duration of the repayment agreement often look affordable and can be significantly lower than the regular monthly payments to all creditors combined. In addition, your creditors have signed on to the agreement and will typically stop all collections actions against you. These services sound good, but there are drawbacks that many people don’t consider.
In order to use these plans to your advantage, you and your family must be willing to dramatically change your lifestyle and give up the use of credit cards over the course of the repayment period. You will be contractually obligated to make monthly payments to the debt consolidation service, or your creditors will have the right to pursue action against you. The debt consolidation service will not extend payment to your creditors if you fall behind even one month.
Talk to Attorney Paul Groman About the Immediate Advantages of Bankruptcy
Statistically, very few individuals or families who begin a debt repayment plan through a debt settlement company or a debt consolidation service complete the terms of their agreements. Any money paid into the plans cannot be recovered. A high percentage of people come to realize that bankruptcy is the best option for eliminating or restructuring debt, often without making impossible changes to their lifestyle.
If you have found yourself buried in consumer debt, get straight answers about the ways the U.S. Bankruptcy Code can help you get a fresh start. Our firm offers a free consultation to discuss your options and explain the process. Let us help you put an end to creditor harassment and sleepless nights right away.