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Debt Settlement Versus Bankruptcy?

If you are facing financial hardships because of your debt, you may be debating about whether to file for bankruptcy or calling one of the many 800 number debt settlement agencies which advertise on TV.  There are huge differences between these options. 

In the last few years the 800 debt settlement companies have grown faster than maggots on rotting meat and are only a little less toxic.  They feed off of the honest intentions of distressed and harried debtors eager to find a solution for their debts.  They are scams and there are several reasons why you should not deal with them.

1.  These agencies charge huge fees up front.  Until these fees are paid in full, your creditors get nothing, only making them hungrier and more aggressive.

2.  Most agreements they make with creditors are only effective when the entire settlement amount is paid.  Therefore, if you drop out of their plan with one payment to go, the entire unsettled balance is due without any discount. 

3.  Bankruptcy brings the Federal Court to the aid of the debtor.  All collection efforts must cease by all creditors or the creditor will have to explain his violations of the law to a hostile Federal judge. Debt settlement companies have no legal power to get creditors to back off.  

4.  Most bankruptcy attorneys charge fees much lower than debt settlement companies.  Moreover, with most Chapter 13 workout bankruptcies, fees are paid over the life of a typical 5 year plan, not up front, and what is not paid up front is generally absorbed by creditors by a reduction of their recoveries. After the bankruptcy, the Courts decree that all debt which has not been reaffirmed is declared extinguished.  Typical recoveries in a Chapter 13 bankruptcy by unsecured creditors are usually 5-10%, less in a Chapter 7.  Debt settlement companies cannot get these kind of reductions because they have no force of law to make the creditors accept the terms. 

5.  Debt settlement companies lower your already low credit score.  By taking their money first, they push back payments to creditors, lowering your credit score and making it even more difficult for you to refinance your way out of trouble. By contrast, discharge from bankruptcy usually raises your credit score because you now have no unsecured debt and that can be verified by checking court records.  In fact, many credit card companies compile a list of persons recently discharged from public records, and immediately offer them cards. Try that with a debt settlement company. 

6.  If you do get a discount from a debt settler, the amount of the reduction is taxable. Debt reductions in bankruptcy are not taxable. 

The bottom line is that debt settlement companies should never be used. Lawyers have strict ethics rules in how they can advertise, unlike the unverifiable and misleading claims of the debt settlers.  The settlers know this and peddle half-truths to desperate debtors.

Why get a Yugo at a Cadillac price?  Call a bankruptcy lawyer.  Call us: 317-748-7772