Bankruptcy provides a remedy debt settlement companies cannot

Credit card bills can easily mount when needed to pay for monthly expenses during a layoff or while recovering from an injury. When debt mounts and becomes overwhelming, Chapter 7 bankruptcy offers a fresh start.

Those who may try to avoid bankruptcy and hire a debt settlement company may actually find themselves worse off than they started. A recent report from a nonprofit group found that consumers who used for-profit debt settlement companies took on approximately 20 percent more debt with no guarantee of a settlement.

Debt settlement companies often advise a client to stop repaying credit card debt and instead deposit the money into a dedicated account. Money in the account ultimately pays the creditors and the debt settlement company. That is if the company can reach a settlement. During this process, credit card debt increases with late fees and interest. Some card companies refuse to deal with debt settlement companies. A credit card company may even file a lawsuit when payments stop.

Consumers are often left without any real benefit even if there is a settlement because of the debt settlement company fees and possible taxes on the amount forgiven.

A Chapter 7 bankruptcy on the other hand has the benefit of the automatic stay. This means that the bank or third party collection company must stop all their collection activities. They cannot call, send letters or proceed with a lawsuit, for example.

A debt settlement company may only negotiate credit card debts, but then medical bills and past due taxes remain. In a Chapter 7 bankruptcy, however, an individual who has different types of debts can get comprehensive relief. A bankruptcy attorney can explain the details.

Source: New York Times, “Report Says Debt Settlement Companies May Leave Clients Worse Off,” Ann Carrns, July 8, 2014.

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