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Debt Settlement and Credit Scores

The Use of Fear of Bankruptcy by Debt Settlement Companies

Most people are worried about bankruptcy and its effect on your credit. In fact people have a strong fear and repulsion to bankruptcy from the social conditioning we all receive.  Bankruptcy is associated with failure, is shameful and for some immoral.  No one wants to file for bankruptcy and people are desperately looking for any alternative to avoid it.

Capitalizing this fear of bankruptcy, many business have made millions of dollars (if not billions) preying debtors with a “miracle” alternative to bankruptcy.

The businesses (who have the name “(blank) Debt Relief”) promise that you can eliminate or resolve your debt without filing for bankruptcy.  Most of these companies have a similar name structure wherein a generic positive word like Freedom or National is followed by the words “Debt Relief”.  These companies state that you can enter into a debt consolidation/negotiation plan wherein you can settle your debt for less without having to file for bankruptcy.

These companies rely on people’s innate fear of filing for bankruptcy in order to sign people up and make money, lots and lots of money.  I have first hand knowledge of how successful these companies are at signing up new customers because the number of my clients who participated in such programs has sky rocketed in the past 3 years.

If they are negotiating people’s debt why are they coming to me to file bankruptcy?  The answer is simple.  Each of these programs requires their customers to stop paying their credit cards and instead pay them.  When anyone stops paying on their credit cards, the credit card companies will send the account to collections, then to an attorney’s office, and then a Summons and Complaint (lawsuit) will be issued against the customer.

This is usually when our law firm comes into the picture.  We will usually file a Chapter 7 bankruptcy case for a fraction of what these companies were charging to settle their debt.  Sadly months or years of payments to these companies are wasted by this time.  And in addition to wasted money, the person has now incurred great damage to their credit score because they were not paying their bills all that time.

A typical Chapter 7 bankruptcy case takes 4 months to complete.  If the person had initially filed for bankruptcy, the bankruptcy case would have been over after 4 months and they could have started to rebuild their credit immediately after.  It is not unusual to rebuild your credit to just below 700 a year after your bankruptcy case.  Two years after your bankruptcy case, your credit score should be well above 700.

The downsides of going with a debt settlement company are very clear.  You will pay for a program that will likely fail because you will be sued by your unpaid creditors.  You will have wasted months or years of having bad credit while the debt settlement program continues.  In the highly unlikely event that the debt settlement program is successful in settling all of your debt….the bad marks you’ve accumulated on your credit report will haunt you and drag your credit score down for years to come.  And you will also get a nice bill from the IRS for all the debt that was settled.

That is why having a bankruptcy attorney look out for your best interest is so important.  When used properly, bankruptcy is a powerful tool to reset your finances and start over.  There is nothing to fear, just the promising outlook of a fresh start.  Our law firm always analyzes our clients cases based upon what is in their best interest.  If bankruptcy is not in your best interest we will let you know.  We have a fiduciary duty to do so, after all.