Debt Consolidation/Negotiation versus Bankruptcy [2011-05-07]
[Timothy Cecil Springer]
Attorney licensed in California
The concept of “Debt Negotiation” was created by creditors to keep you out of bankruptcy. However, the true intent (all the PR hype notwithstanding) was to keep the creditors in control.
There are a few different methods to the debt negotiation approach. However, the usual is to have you sign up and then they tell you to stop making payments to your creditors. The reason for this is there is no reason for creditors to negotiate with them if you are making your payments on time. You then make payments to the debt negotiation company. They take their fees off the top, and place the remainder in a trust account. When they have saved up a large sum, they will then approach a creditor with an offer.
Example: You have a credit card with XYZ Bank. You owe them $5000.00. The company has you stop making payments to XYZ and saves up the payments you make to the company. When you have say $2500 in the company’s trust account, THEN they go to XYZ and offer that amount to settle the debt. In the meantime, XYZ has been hounding you constantly for a payment. There is NOTHING that says XYZ must deal with the negotiation company, and they are still looking to YOU to get paid. Maybe they’ll deal with the consolidation company, maybe they won’t. If they refuse, they can (and will) still call you. They can still sue you, and they often will. When you bring this concern up to the company they often shrug, and say, “they simply will not deal with us, but we tried, so we earned our fee.”
In Chapter 13, you and your attorney create a repayment plan based upon your income, and what you can afford. What your payment is depends on your income. In nearly all cases the interest on unsecured debt stops. A Chapter 13 Plan is created and submitted to the court for approval. If your plan is confirmed, you’re done. Just make your payments to the Chapter 13 trustee, and they divide it up amongst the creditors. At the end of your plan, (in most cases) any balances owed on the unsecured debt are discharged, and you come out debt free. (Each case is different. An “experienced” bankruptcy attorney in your area can advise you how your case is likely to come out.)
In the Debt Negotiation model, you make payments to that company. In Chapter 13, you make payments to the Trustee. Each divides it up amongst creditors. In debt negotiation, the creditors are in control. In Chapter 13, you and your attorney are in control and YOU ARE PROTECTED BY THE COURT. The creditors cannot refuse to negotiate. They cannot call. They cannot sue. The creditors do not have much say in a Chapter 13, as long as your plan is reasonable.
In Chapter 13, you have the protection of the Bankruptcy Court. In Debt Negotiation, you have NO protections. That is the simple difference. At the very least, talk to an experienced bankruptcy attorney before making a decision about which direction to go.