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Debt Settlement Plans: Part II

by Mark Buckley

You’ve tried calling each credit card company to work out a debt settlement plan, but they aren’t interested.  Interest rates have only skyrocketed in the past year.  The bills keep coming and you are drowning in debt.

What if your “minimum payments” on credit cards add up to $ 1,000 a month?  Few debtors can honestly afford repaying such a high amount without using other cards for their daily living expenses.  It becomes a game of robbing Peter to pay Paul.

It would seem like a miracle for a “credit counseling” company to get your payments down to $750 per month by decreasing your interest rates.  Who wouldn’t want to save $ 250 a month?  Although saving $250 per month may sound good at first, here is the bigger question.  Do you honestly even have the $ 750 available?

If you can only afford $300 a month, a plan that requires you to pay $750 per month will not do you much good. You are still in debt. For this reason, “credit counseling” companies and “debt management” companies focus exclusively on the amount of savings they offer, rather than whether you can actually afford your payments.  Many clients who ended up filing bankruptcy in Rhode Island wasted thousands of dollars on unrealistic repayment plans first.

Added to the misleading nature of “debt management” company claims are hidden fees and fraud. Consumer Reports claims that

” Many [“debt management” companies] advise rolling high-interest debt into a second mortgage. But by using your house as collateral for what was unsecured debt, you risk losing your home. Some firms can persuade creditors to cut your debt. But if you miss payments they can later back out of the deal and demand full payment, potentially landing you in bankruptcy court after you’ve already paid a large portion of your debt.”  Consumer Reports online report, June 2005.

Filing Chapter 7 bankruptcy offers a straightforward, honest, effective alternative to the misinformation propagated by “debt management” and “credit counseling” companies. Federal bankruptcy laws were created by Congress for the purpose of helping hardworking citizens pay off their debts.  Unlike DMPs, bankruptcy actually reduces both interest and debt. In fact, bankruptcy is the only way to completely eliminate a debt.

Bottom line: Before you look into signing up for an unrealistic debt management plan, consider consulting a qualified Rhode Island bankruptcy lawyer.

Filed Under: Blog, Rhode Island Chapter 7 Tagged With: Bankruptcy, bankruptcy lawyer, business, Chapter 7 bankruptcy, credit, credit cards, credit counseling, debt, debt management, debt management companies, debt management plan, debt relief option, debt settlement, debt settlement plan, economics, filing bankruptcy in Rhode Island, filing for bankruptcy in RI, finance, insolvency law, Mark Buckley, part ii, payment plan, Personal Finance, Rhode Island, Rhode Island Bankruptcy lawyer, rhode island bankruptcy lawyers, secured loan, settlement planning, the truth about

The Truth About Debt Settlement Plans: Part I

by Mark Buckley

Is debt settlement a realistic option?  As a Rhode Island Bankruptcy lawyer, I get calls daily from families who are struggling with excessive credit card debt.  If the credit card debt is less than $ 8,000, I rarely suggest bankruptcy as the solution, unless there is additional non-credit card debt that makes debt repayment impossible.

In every debt consultation, however, I ask what other solutions have been attempted to repay debt.  Then the stories of debt settlement attempts and debt management plans begin.  Many have paid large sums of money to finance a debt settlement plan that failed.  Hundreds and thousands of dollars were wasted on unrealistic plans that were doomed from the start.  Why does this happen to so many people?

The term “debt settlement plan” is a misleading one.  Most of the Rhode Island advertisements I have seen for this kind of debt settlement plan—whether on the internet, on television, or in phone books—are placed by “debt management” companies, also known as “credit counseling” companies. Despite their name, most of these companies only aim to get you to sign up for what they call “debt management plans” (DMPs) and do not give actual advice on credit. What you might not know is that credit card companies sponsor DMPs in order to collect money from you. In essence, then, “credit counseling” companies serve as bill-collectors for credit card companies.

The debt settlement advertisements run by these “credit counseling” companies are misleading as well. For example, when ads claim that DMPs will “reduce your debt by 60%,” they may lead you to believe that they will actually reduce the amount of your debt. However, the most a “credit counseling” company can do is reduce the interest on your credit card—and not by much. In reality, you still must pay your entire debt along with most of the interest. Ultimately, “debt settlement” plans do anything but do away with your debt.

Additionally, when setting you up with a “debt settlement plan,” “credit counseling” companies often fail to take all your expenses into account. This is usually because the plan they offer you is far more expensive than what you can afford to pay. Thus, although they promise to eliminate debt, DMPs do not bring you any closer to making ends meet. In fact, almost 90% of DMPs tank before completion. All said and done, the hope offered by DMPs is nothing but a scam—lowering the interest rates on your credit card by a few points is far from a financial fix.

What’s worse, “debt management” plans actually damage your credit. As part of an arrangement called “fair share,” credit card companies are paid a percentage of the amount that the “debt settlement” company collects from you. Thus, the more you pay a “debt settlement” company to get yourself out of debt, the more of your money goes to pay off the credit card companies. And as long as these companies can continue to milk you, they will—regardless of whether you can afford your plan or not.

One Caveat:  For those who only need help with budgeting, and have a modest amount of debt that can be reapaid comfortably in 24 months or less, I am the first to recommend a call to a local office of Money Management International.

Filed Under: Blog Tagged With: Bankruptcy, card debt, Chapter 7 bankruptcy, credit, credit card, credit card debt, credit cards, credit counseling, debt, debt consolidation, debt management, debt management companies, debt management plans, debt settlement, debt settlement plan, economics, filing bankruptcy in Rhode Island, finance, Mark Buckley, money management international, Personal Finance, Rhode Island bankruptcy, RI bankruptcy lawyer, settlement planning, the truth about

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