7 years ago · Danielle Patton · 15,207 comments

Why Debt Consolidation is a Bad Idea (or Worse, a Scam)

There is enormous stigma that goes along with bankruptcy filing. The mere word “bankruptcy” invokes a feeling in many of immorality and failure. People usually dread the thought that bankruptcy may be in their future. Yet phrases like debt consolidation, debt resolution, credit management, debt relief, etc.; these terms invoke a completely dissimilar emotional response. These concepts are marketed as an alternative to bankruptcy: a way out of financial hardship, but not shirking one’s responsibilities. However, all is not what it seems.

Don’t be The Next Victim

In most circumstances, debt relief agencies are marketing professionals but are a poor choice in retrospect. Myriad debt relief agencies promote their services as a direct alternative to filing for bankruptcy; nonetheless, in truth, they thrive on preying on people’s emotions, sprouting a false narrative, and crafting false expectations.

Normally, a debt relief agency will demand a signed contract in which one promises to make periodic payments to the agency. This agency will weave an elaborate story so you feel confident enough to send them cash each month. The idea they’re selling is that a fund will be shaped to help settle your accounts. The agency will then create a clever name your “special account” and paint a picture of you taking proactive steps in launching you on the right financial track again. Soon after, the debt relief agency will gather your money, subtract their fees, and attempt to settle your debts for less.

Well, that may sound ideal, but the unfortunate reality is a debt resolution company can’t stop creditors from reporting delinquencies on your credit report. This “solution” doesn’t prevent creditors from commencing civil law suits, from garnishing wages, levying bank accounts, or even force a creditor to take less than it is owed. That is the simple truth.

Debt Settlement is Better for Your Credit?

Don’t believe it. Creditors will continue to report late accounts. Collection agencies will purchase the debt and report it as a collection account as the original lender reports the debt as a charge-off (a double blow to your credit). Civil judgments will occur subsequent after the creditor files suit to which there is no defense. And all this will continue until the debts are finally paid.

Does Bankruptcy Affect Your Credit?

Of course it does.  But it is not as dramatic as most people think. Bankruptcy filing does not have the same impact to one’s credit as it once did. Bankruptcy will appear once on the credit report and all debts thereafter will state “included in bankruptcy”.  That’s it…damage done.  Now the process of reestablishing your credit can begin.  A chapter 7 debtor will start receiving offers for credit cards immediately (high rates and poor terms, but it is available).  Most mortgage underwriting guidelines require two years from bankruptcy to qualify for a mortgage loan and some programs require as little as one year of chapter 13 payments. Voilà–bankruptcy is filed and a fresh start is commenced.

I am a bankruptcy attorney so some may say that my opinion of so-called debt relief agencies is prejudiced.  But I feel passionate about what I do and hate to see people taken advantage of by these wolves in sheep’s clothing.  I have had hundreds of clients that have come to me after first using one of these services and I can honestly say that I have never heard of one success story.  Paying some agency to hold your money while your credit is ruined, and lawsuits rain down, all the while the amount owed to creditors increasing because of default interest, penalties, and attorney fees, is just not a wise decision.

Bankruptcy Provides Legal Protections

Only bankruptcy can provide the legal protections necessary to keep creditors at bay and provide the tools to effectuate a fresh start.  The bankruptcy process is a well-oiled machine, designed by Congress to treat creditors and debtors fairly.  Don’t let the marketing fool you. Don’t equate bankruptcy with failure.  Use the tools that our legal system has provided just the same as any good business owner would, then focus on the future with a clean slate.

If you have questions about your options and want to see if bankruptcy is a good choice for you, I am always happy to meet for a free consultation.  Maybe bankruptcy is not the best option, but let your decision be based on the facts and the law, not marketing and false narratives.

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