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Debt settlement: how it really works

By Cathy Moran

debt settlement behind the curtain

Debt settlement companies thrive on tapping the consumer’s genuine desire to pay back their debts. They don’t tell you how debt settlement works, in reality.

They promise that they will compromise with your creditors for a sizable discount and all will be well with the world. There are any number of reasons that isn’t so, and the promoters know it, but that’s another blog.

How debt settlement works

The scheme works because the debt settlement company gets a hunk of their fee first, before creditors are offered a dime.

And they get it by automatic withdrawal from the consumer’s bank account. I have been amazed lately at just how hard it is to cancel one of those payment arrangement.

Customers or victims

The couple in my office this week are poster children for the absurdity of the debt settlement program. The numbers supplied to the desperate couple, 79 and 76, showed that $19K would go to creditors and $16K to the debt settlement company. Huh?

The other absurdity was that this couple had only Social Security and a small pension for income, and they have a substantial mortgage payment. Both of those kinds of income are fully exempt from creditors in California.

Yet, the debt counselors(!) wanted $1036/month for this “service”!

Needless to say, the entire arrangement was unworkable and any debt expert worth a $16K fee knew it from the start.

Yet, the firm got several months worth of $1000 bank drafts before the couple’s son learned what was going on and helped extract them from the “program”.

Evaluating alternatives for debt

The first step in assessing your alternatives is to figure out whether you really need to do anything. For the couple in this piece, their Social Security and their pension income was fully protected from collectors and their California homestead protected their home.

They could simply do nothing, secure in the knowledge that even a creditor with a judgment couldn’t take anything from them.

Another alternative was to deal directly with the creditors, make payments affordable in their budget, and send a do-not-contact letter to each creditor to cut off collection calls and letters.

Of course, bankruptcy is an alternative, if they felt such stress in using the other alternatives that it compromised their mental health.

But that choice makes sense only if they understand that, objectively, they don’t need bankruptcy to be safe from creditors, they need only the peace that bankruptcy brings.

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Filed Under: Consumer Rights, Debt Collection Rights, True Stories

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

About The Soapbox

You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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