How many times have you turned on your TV or radio and heard an ad proclaiming how a particular debt settlement company can negotiate with your lenders to lower your interest rate and reduce your monthly payments. Does it sound too good to be true? Chances are that it is.
How debt settlement companies work
When you contact one of these companies and discuss your financial problems, they will ask you how much you owe and who your creditors are. Then they estimate how much your debt can be reduced and present you with a new, lower monthly payment.
Following their instructions, you stop paying your creditors and send money to the settlement company instead. They put your payments into a savings or escrow account and, once a certain amount of money has accumulated, they contact your creditors to negotiate a settlement. If the creditor agrees, then the company pays the negotiated amount and charges you a fee. Some companies charge their client a flat rate while others want a percentage of the canceled debt.
The consequences of settling
It all sounds promising on the surface. The debt settlement company reduces your debt to a more affordable amount, you pay them, and they pay your creditors. The problem, however, is that you have to allow your various accounts to become past due. This creates consequences such as:
- Collection calls and letters
- A reduction in credit score
- Late payment reports to the credit bureaus, which will remain on your report for up to seven years
This delinquent information does not disappear from your credit report after the debt settlement company pays your creditors. A successful settlement will simply show up on your report as “Charged-Off Settled” or something similar. You will still have to work on rebuilding your credit before you can be approved for a mortgage, favorable auto loan, or any type of unsecured credit.
When bankruptcy may be better
If you are struggling with mounting credit card bills, medical debt, and other obligations, then filing for Chapter 7 can wipe the slate clean. If you opt for Chapter 13 instead, then you will put together an affordable repayment plan that your creditors will be compelled to accept. With both chapters, you are protected by an automatic stay that puts an immediate stop to all collection actions against you. Debt settlement companies lack the power to protect you from creditor demands.
Before reaching out to a debt settlement company, contact a New York bankruptcy attorney who can assess your situation and advise you on whether bankruptcy is a viable solution. Working with an attorney is the recommended way to reduce or eliminate your debt load and begin afresh. Jayson Lutzky handles personal bankruptcy cases in the Southern and Eastern Districts of New York. To set up a free in-person initial consultation with Mr. Lutzky and start your journey to financial freedom, call 718-329-9500. Visit www.MyNewYorkCityLawyer.com/Bankruptcy to learn more.