Category Archives: Rhode Island

Many clients who come to me to discuss their bankruptcy options have previously tried other means of resolving their overwhelming debt issues. Most often these clients have attempted to work with a debt settlement company. Debt settlement is a process which attempts to get the credit card companies to accept less than 100% of what they are owed on a credit card debt. Ordinarily, the credit card companies are only willing to offer a discount if the credit card payments are seriously (many months) delinquent. They generally insist on receiving the full amount of the settlement within one to three months. This makes it very difficult for people to settle credit cards on their own, because they have to accumulate a fairly large amount of money to have available as a settlement funds. The debt settlement companies deal with this by insisting as part of your contract with them that you pay them a hefty amount each month to eventually build a settlement fund.  Typically, however, the first $3,500 they receive from you is applied to their fee. Only then does your “settlement fund” start to build. Problems with the debt settlement alternative include the following:

• some of the outfits in debt settlement business are disreputable fly-by-nights
• the fees are often quite steep
• assuming that they are able arrange some settlements, by the time these settlements start coming through, you will likely have dealt with many months of creditor harassment, and may be facing lawsuits, wage attachments, and liens on your home
• there will likely be a very material negative impact on your credit score
• generally speaking, unlike the situation with bankruptcy, when debt is discharged in the context of a debt settlement, the amount that the creditor agrees to write off will be reported as income to you to the tax authorities so you will be paying taxes on the amount that is forgiven
• if you become dissatisfied with the way things are going with your debt settlement program (for example if lawsuits start being filed against you) and you want out, it may be difficult to get a meaningful refund.

I should caution that because of the nature of my practice, I rarely see success stories with debt settlement alternatives. That doesn’t mean they don’t exist and the purpose of this post is not to dissuade you from checking into the debt settlement alternative. However, just like everything else, you should proceed cautiously – ask a lot of questions, insist on getting everything in writing, read the fine print, and be comfortable with the refund policy if things get ugly. Most importantly be sure that you are dealing with a reputable company – remember – just because they advertise on the radio or television does not guarantee that they are legitimate.