Have you ever been at home and on the TV a good-looking spokesman comes on and asks “are you overwhelmed by debt?” The pitch sounds great. Nobody wants to talk to their creditors on their own, and filing for Bankruptcy can be intimidating, so the idea of hiring someone who will reduce your balances by 50% or more is just too attractive to pass up.
I have been a Bankruptcy attorney for over 20 years, and I can say that once upon a time there were some really decent debt consolidation/relief agencies. They negotiated hard for their clients, but their leverage against the creditor was always “if you don't take this deal, I'm going to send this person to a Bankruptcy attorney and you'll get nothing.”
Frankly the system worked, and back in the 1990's and early 2000's we used to send people to those agencies and they used to send people back to us.
Unfortunately, most (if not all) of those companies are gone. Instead of a local company that you can visit, with an actual live human being that you can sit down with, debt relief agencies have been transformed into huge behemoth organizations, generally speaking. There might be one or two lawyers on salary but they aren't really working for you. They are working to keep the debt relief company from being sued.
No, generally speaking, your file will be in the hands of one of hundreds of “CSR's”, or “customer service representatives”. After the call center salesperson signs you up, almost all of your communication will be via email.
And this is where the problem happens. You will stop seeing the bills. You will stop getting the phone calls. You will “feel” like something is working in your favor. What has really happened is that you have signed a legal document authorizing the creditors to speak only to the debt relief agency and not to you. For that reason, you stop seeing the bills and you stop getting the phone calls but you didn't stop owing the debt.
Most people don't realize that there is a problem until they have been in one of these programs for a couple of years and all of a sudden, they apply for credit and are denied, or they find out that their wages are being garnished by a creditor.
The problem is so severe that the official Bankruptcy forms have were amended to include the following question: “Within 1 year before filed for bankruptcy, did you or anyone acting on your behalf pay or transfer any property to anyone who promised to help you deal with your creditors or to make payments to your creditors?”
If you answered “yes” to that question you have to follow up by providing the name and address of the agency, the dates you made payments, and the amounts of those payments.
The reason that the U.S. Justice Department asks for that information is oftentimes they go back to the debt relief agency and make them disgorge their fees that were charged to you because they did not really provide you with the service that they promised.
Debt relief agencies usually try to scare you away from filing for Bankruptcy, but the truth is that filing for Bankruptcy is extremely commonplace and it does not operate to bar you from financing a car, or a home in the future. Also, remember that you are not signing up with an attorney…an attorney who is subject to ethical rules of conduct, mandatory disclosures, the oversight of the Bankruptcy Court on our fees, and the oversight of the State Bar Association.
If you are considering signing up with one of these agencies, you need to be proactive and demand, in writing, proof that they are meeting their promises. If they say that they have reduced your balances by 50%, get that promise in writing, with specific creditors. In fact, do your due diligence and call up some of your creditors and find out if the debt relief agency was able to reduce your balances the way that they promised.
Don't make the mistake of paying fees towards a “debt consolidation/relief” plan, only to find out years later that you didn't really make a dent in your debt and you needed to file for Bankruptcy anyway. Bankruptcy is often way cheaper to file than a debt consolidation plan, and your fresh start happens within a few months in a Ch. 7. The ability to save money instead of making fruitless payments gives you an economic cushion, and starts you off on the right financial footing to build your credit the right way.
Anyone who promises you something that sounds too good to be true, is usually selling you something that doesn't really exist.