Debt consolidation rarely solves the problem.
Video Transcribed: Edward Kelley back with 1-888-debtline, answering your bankruptcy questions. We are doing the series, “Top Five Questions I get As A Bankruptcy Attorney,”. Number four, “What about debt consolidation? Shouldn’t I do that instead of a bankruptcy?
Well, as with anything, it depends to some extent, but generally my experience and this is coming straight from you, my clients, is that debt consolidation rarely solved the problem. Now, if you’re not familiar with what that is, there are a lot of companies that will set you up on an auto pay, take a certain amount of money out of your bank account every month, put it in their own bank account and with that, they are supposed to negotiate with your creditors for a reduced settlement. Their pitch is generally, “Well, you’re going to take care of these debts and pay everything that you can toward them and you won’t have a bankruptcy on your record.” So let me say a couple things about that.
One, again, my experience is that it generally doesn’t work. I’d say probably 25% of my clients have tried to do this and found that the companies were not able to negotiate a settlement that they could afford. In several cases, more than several, many cases, they were almost completely unable to stop the auto-draft from the debt consolidation companies. Again, I’m not talking about any specific company or trying to slander anybody.
There are a few that are at least honest, if not always effective, but I have had personal experience or several horror stories from my clients where even upon filing of the bankruptcy and notice these places were still pulling out hundreds of dollars a month. It’s been my experience that a bank, if you have an auto-draft, a bank, you’ll have to do a stop payment every month.
There is no, “Hey, I want you to stop paying this person or stop that auto-draft.” The bank generally can’t do that. If you’re getting $200 a month taken out, you’ll have to do a stop payment on the amount, $200 every month. So it becomes a question of getting them to stop doing it. It’s kind of like the classic gym membership that can be really tough to do. In addition to that problem, I haven’t personally seen a lot of cases where they actually are able to settle and take care of all of a person’s debt.
They don’t have a tremendous amount of leverage, certainly not what a bankruptcy attorney has. If I try to settle a debt for somebody, if I can legitimately say, “Hey, take this or we’re going to do a bankruptcy,” there is the absolute possibility they will get nothing if they don’t the deal.
When you negotiate from that standpoint, that’s a lot different than saying, “Hey, just please take less than what you’re owed.” That’s a pretty hard sell for anybody. I’m not saying it never happens. I think these companies often will take maybe 10% to 20% off of the debt, but if it’s substantial debt, that still leaves most people with an amount owed that is not manageable. Bankruptcy, it’s unsecured, it’s gone. I charge $1850. At this point today generally start to finish for chapter seven and you’re done. You’re going to get rid of every debt that you can get rid of and the debts that you can’t, you’re going to have room to pay them. That’s some problems with debt consolidation.
For some people, they find bankruptcy absolutely morally repugnant and shameful, and their mind’s not going to be changed. That may be the way for them to go. But definitely be aware and be careful if you’re thinking about debt consolidation and consider a bankruptcy. In another video, I’ve talked about the impact on your credit of a bankruptcy, which surprisingly can often raise it depending on how overextended you are, which most people are in a bankruptcy. Another myth that debt consolidation will harm my credit less, that is certainly not always the case or I would say not even often the case. I can be reached (888) Debt-Line or email at email@example.com