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Bankruptcy vs. Debt Consolidation

Bankruptcy vs. Debt Consolidation

Debt consolidation companies rely on negotiations with creditors. Creditors may or may not want to negotiate and do not have to participate in a private debt consolidation plan. In addition, creditors can opt out of participating in a debt consolidation plan. Most debt consolidation companies can only address certain limited types of debt, for example, only credit card debt. In my discussions with clients who initially signed up with debt consolidation companies, I noticed that some clients were later sued by creditors that were supposed to be paid through their private debt consolidation program. On the one hand these private debt consolidation companies tell the borrower to stop making payments to their creditors (that is, to default on your obligation to pay), and once the borrower gets sued, the debt consolidation companies do nothing to help. Bankruptcy, on the other hand, has rules that creditors must follow.

When you file a bankruptcy case, either a Chapter 7 or a Chapter 13, a provision of the Bankruptcy Code known as the “Automatic Stay” goes into effect. This provision of the Bankruptcy Code puts a stay or stops creditors’ collection efforts, including lawsuits, garnishments, repossessions and foreclosures. It is one of the major benefits associated with filing a bankruptcy. Although there are few exceptions to the Automatic Stay provision, creditors must follow the rules of the Bankruptcy Code. On the other hand, debt consolidation agencies attempt to negotiate with your creditors. Creditors are not obligated to negotiate or follow the terms of repayment that private debt consolidation companies propose. Creditors may or may not accept the terms they are offered. Creditors are free to sue you even if you are in a debt consolidation program. In Bankruptcy, however, creditors must follow the rules of Bankruptcy Code. They don’t have a choice – it’s the law.

Before you sign up for a debt consolidation program, I suggest you do the following:

  1. Ask them if you will be defended from lawsuits if your creditors are not willing to negotiate. If yes, get it in WRITING. Demand to get the credentials of attorneys who are going to defend you if lawsuits are filed against you. You’ll find that these debt consolidation companies are not likely to be willing to defend you. Simply put, they will ask you to stop making payments on your debt (and pay them instead), meaning they are asking you to default on your agreement with your creditors, but they don’t help you if a creditor sues you for not making payments. I have seen this scenario on multiple occasions.
  2. Ask to see if they are properly licensed and bonded in your state to offer private debt consolidation services. Demand to see evidence.
  3. If they represent that they have “lawyers on staff,” demand a list of these attorneys and contact them. Ask them if they are going to defend you in lawsuits that can result once you are instructed to stop making payments to creditors. Ask them if they are licensed to practice law in your state. Ask them if their fees incurred in defending you are included if you sign up for the debt consolidation program.

I suggest that you consult with one of our attorneys BEFORE you sign up for these private programs. I frankly don’t see a reason why you should spend your money on these programs. You can contact your creditors and negotiate with them directly. If they are not willing to negotiate with you, then why would they change their mind if someone from a private debt consolidation agency contacts them on your behalf?

Remember, if a debt consolidation company asks you to default on your payments (that is, stop making your payments) and asks you to make payments to that company for their fees first, be alarmed. There is a lot of abuse going on in the debt consolidation business. Be careful.