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Are there risks to debt relief companies in lieu of bankruptcy?

For residents of Quincy and throughout Massachusetts who are facing financial challenges, the prevalence of advertisements promising help with clearing debt without filing for bankruptcy might be an alluring temptation. For many, there is an ingrained fear of the word “bankruptcy” that leads them to try alternatives. However, there are often underlying circumstances with debt settlement companies that people are unaware of. These can ruin the attempt to eliminate debt and make the person’s problems worse.

In general, a debt settlement company is for-profit. The company asserts that it will negotiate the credit card debt with the companies, settle it for less than is owed, and allow the debtor to move on. It is a lump sum. This money is usually set aside in an account and then transferred into an escrow-type account until enough is saved to pay the settlement.

There are risks to a debt settlement plan. The money will often have to be deposited into the special account for three years or more before settlement. This can be a problem for many people and they leave the program before it is completed. The creditors are not obligated to negotiate the debt with the company, so it might not even work. The company will also advise the debtor to stop making credit card payments. As most debtors understand, this can accrue late fees and other charges, as well as cause further damage to the credit score.

Some of these companies are underhanded. Red flags involve charging fees prior to settling the debts; promoting a program from the government; guaranteeing that the unsecured debt can be cleared; advising the debtor to cease communications with the creditors without addressing the consequences; and guaranteeing that the debt can be settled for far less than is owed.

People who are fearful of using bankruptcy to eliminate debt should be aware of the benefits of a bankruptcy filing and how it is easier, quicker and safer than many debt settlement plans. Discussing a case with a legal professional who is experienced in debt relief can provide all the positives and negatives of the available options and help to come to a solution to get back on stronger financial ground.

Source: consumer.ftc.gov, “Settling Credit Card Debt — Debt Settlement Companies,” accessed on June 27, 2017