Common Bankruptcy Atlernative Options – Their Pros and Cons

You might notice ads for debt relief services, like credit repair services, debt consolidation, debt settlement, and debt management plans, on the internet, radio, or television. If you’re in dire financial straits, this type of service might sound like the perfect solution to your debt problems.

But, in many cases, the for-profit companies offering these services are scammers who provide little or no help after you’ve agreed to pay them. Even if a debt relief company does help you, you’ll have to pay a lot for services you could do yourself or would be better off paying an attorney or legitimate credit counseling agency.

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Debt Management Plans

Debt relief companies sometimes offer to arrange a “debt management plan” to pay back your creditors. These plans often include reductions in interest rates or other favorable terms so you can afford repayment.

How Debt Management Plans Work

Here’s how a typical debt management plan might work: The debtor deposits money into an account each month. The debt relief company uses the money to pay the debtor’s various creditors under the plan. In most cases, the debtor has to make regularly scheduled payments into the account for three to five years. The terms of most plans also require the debtor to pay the debt relief company a fee in addition to the monthly deposits.

Avoid For-Profit Companies

In almost all cases, you should avoid for-profit companies offering these plans. However, you might consider arranging a debt management plan with an accredited, nonprofit credit counseling agency (see below) after considering all of the pros and cons.

What Is Debt Settlement?

Some debt relief companies claim they’ll work out deals with your unsecured creditors to significantly reduce your debts (supposedly) by 50% or more. To get this kind of reduction, they negotiate lump-sum settlements.

How Debt Settlement Works

As part of the process, the debtor usually makes regular payments into a designated account rather than to creditors. Or the company might have you open a savings account in your name and accumulate funds there. Once the account has sufficient money available, based on the debt settlement company’s opinion, the company negotiates lump-sum settlements with your creditors. The company pays the creditors—and often themselves—with money from the account.

But what the company won’t tell you is that, in the meantime, your debt grows bigger, your creditors might not settle, and its fees are probably high. In almost all cases, it’s better to hire a reputable attorney rather than a debt settlement company if you want help negotiating debt settlements.

Also, one thing to keep in mind is that settling a debt could have tax consequences. The IRS generally considers canceled debt of $600 or more as taxable. Unless you qualify for an exception or exclusion, settling debts for less than you owe might increase your tax liability depending on your tax bracket and the canceled amount.

How Debt Consolidation Works

Companies sometimes offer to reduce your monthly payments by rolling multiple loans together into one. This process is called “debt consolidation,” which has some upsides and downsides. You might have other options—perhaps better ones—for getting out of debt trouble rather than consolidating,

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Signs of a Scammer Company

If a debt relief company does any of the following, it’s most likely a scammer.

• The company guarantees your unsecured debts will be paid off at less than half their value.
• The company charges large monthly service fees (or hefty upfront fees).
• The company insists that communications to your creditors go through them and won’t allow you to make direct payments to your creditors.
• The company assures you that you won’t face creditor lawsuits.
• The company tells you that its services will improve or have no negative impact on your credit reports.
• The company claims it can remove negative information from your credit reports—even if the information is accurate.

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Beware of Facade Law Firms

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