Fort Lauderdale Bankruptcy Lawyer Blog

In the course of my work as a Fort Lauderdale bankruptcy attorney, I am often asked by potential clients what the difference is between debt settlement and bankruptcy. For those who qualify for Chapter 7 (which requires no repayment of debts but the discharge of all unsecured debt), the difference is between making monthly payments to a debt settlement company or discharging all of your debts with no monthly payments. For most people, getting rid of all your debt for the price of the bankruptcy makes the most economic sense - especially when you realize that the impact to your credit score is the same and sometimes even better with a bankrutpcy.

But what about those who don't qualify for Chapter 7? Their only bankruptcy option is to file a Chapter 13, which is very similar to a debt settlement plan but better in the long run.

In a debt settlement arrangement, the credit card companies still hold all the cards. They decide if they will enter into a settlement. They decide how much they will settle for. They decide whether they will stop charging interest and late fees while you're in the plan. And the plain truth is that some of the major banks will not enter into settlement agreements. So if you have 10 credit cards and only 5 settle, you still have to deal with the other 5 companies or possibly get sued by them for the balance. Most of the debt settlement companies forget to mention these things.

In a Chapter 13 repayment plan, the amount you have to repay will almost always be less than what you would pay in a debt settlement plan. Depending on various factors - principally your income and expenses - you can get a discharge of your debts in a Chapter 13 case and only repay anywhere from 0% to 100% of your outstanding debt on the day you file.

Why is it better to repay debt through a Chapter 13 instead of doing debt settlement? First, you set the repayment plan according to your disposable monthly income. Second, all of the credit card companies have to accept what they get paid and the balance is discharged at the end of the payment plan. Third, you do not pay interest or late fees while in the plan - your debt does not increase. It kinda freezes on the day you file. Also, in Chapter 13, your repayment plan will be for either 36 months or 60 months, depending on your Means Test results. This can result in significantly less paid out over time than one would have to pay in a debt settlement arrangement.

So even if you have too much income to qualify for a Chapter 7 case, but are having trouble managing the monthly payments on credit cards, you should consult with a Broward County bankruptcy attorney about the possibility of filing a Chapter 13 case. You may be surprised at how you can pay off your unsecured debts with affordable monthly payments in less than 5 years!

Unscrupulous debt settlement companies may be a thing of the past when new rules go into effect in September, 2010. The new laws have three major changes:

1. The debt settlement companies will not be able to collect service fees unless they have
successfully negotiated or settled at least one of your debts. Additionally, they must
also spell out their fees in formal written agreements.

2. The agencies must also keep your money in a federaly insured bank. As an added
protection, your money must be placed in a dedicated account that is in your name
and which you have control over.

3. Debt settlement companies will now be required to tell you the negative consequences
of their services. One of the strongest advertising pitch of debt settlement is "avoid
bankruptcy" - but what they don't tell you is that debt settlement will impact your credit
score similarly.

So what do you do if you can't pay your debts? LInda Sherry, director of Consumer Action, suggests that your best bet is to get counseling from a non-profit credit counseling firm. In some cases, the best option really is bankruptcy because your debts are wiped out permanently. "I think a lot of people are afraid of bankruptcy, but for some people, it's the best option."

On my website, I wrote an article about the FICO score and drew a comparison of the pros and cons between credit counseling (a.k.a. debt settlement) and filing bankruptcy. One of the cons against credit counseling agencies was the fine print in the contracts that allowed the agency to keep most if not all of the money that you pay to them if you decide to drop from the program. This issue is being addressed in ground-breaking congressional legislation that will put an end to the abusive and deceptive practices of the debt settlement industry.

The Debt Settlement Consumer Protection Act of 2010 would limit fees charged to consumers, require that credit card accounts be actually settled before the company can collect fees for providing the settlement and allow states greater power in protecting consumers in this area.

Debt settlement companies have sprung up everywhere since the current economic crisis began. Their sales pitch is simple and attractive to those that may not have all the facts about bankruptcy and think that debt settlement is the only way out. The consumer is told to stop paying their credit cards and make monthly payments to the debt settlement company instead. The debt settlement company places the money in an escrow account and when enough money is accumulated, the debt settlement company tries to negotiate a payoff with the credit card company.

Sounds great but the reality is that not all credit card companies participate in these programs and most of the debt never settles at all.

Continue reading "Ft. Lauderdale Debt Settlement: New Legislation Could Shut Down Unethical Credit Counseling Firms" »