Debt Consolidation or Bankruptcy?

A common issue with many of my consumer bankruptcy clients is waiting far too long to call me.  So many people struggle so long with their credit card debt that is out of control that by the time they pick up the phone to call me.  By that time their options are extremely limited. Many people try to settle their debts, either on their own or through a “debt consolidation company” out of some sort of phobia of thinking about filing a bankruptcy — or even talking with a bankruptcy lawyer.  A large percentage (at least 50%) of my clients who see me primarily because of mounting credit card debt have already attempted to find an exit through a debt consolidation firm.  After one, two or even three years of making payments through a debt consolidation company, many give up and find their way to my office.

Typically, these debt consolidation companies fall into one of a couple possible categories (1) they try to solve the problems of their clients, but are unable to, or (2) they are downright unethical and are only interested in running up fees.  What people don’t realize is that debt consolidations companies are doing nothing but getting you on a payment plan while NOT paying your debts for you and eventually attempting to reach settlements with your creditors.  I want to make sure that you understand that.  You will be paying them for at least a while, while they do nothing but bank that portion of your money that doesn’t go to paying their fees.  While the hope of many people struggling with debt is to use these bankruptcy alternatives in order to rescue their credit ratings, the truth is their credit rating will necessarily suffer in order to make their plans possible.  As I mentioned before, a great many debtors attempt to settle their debts with a consolidation program, only to find that they have spent thousands of dollars on fees, failed to get out of the credit crunch, and still see their credit ratings plummet.  But often the worst thing that happens isn’t the money out the door without a solution, and it isn’t the tanking of the credit rating without a real solution either.  The worst thing that really happens is that more and more time wasted.   The delay in finding a solution can literally mean adding years to the problem.  Instead of beginning to rebuild your credit, you may find yourself struggling with the same debt issues for years with no guarantee that your creditors will agree to a workable settlement.

The bottom line is that a debt consolidation plan attempts to mimic a Chapter 13 bankruptcy plan without the weight of the United States Bankruptcy Code and the United States Bankruptcy Court to back it up.  There is no requirement that creditors accept a workable settlement with your consolidator.  There is no requirement that all creditors be addressed.  There is no requirement that the payment plan necessary to settle even some of your debts will be feasible given the debtors income and necessary monthly living expenses.  In a Chapter 13 plan ALL debts must be addressed.  In a Chapter 13 plan creditors have no choice but to accept plan payments (although, they can in certain circumstances object to a plan if the plan discriminates against them or is otherwise improper).  In a Chapter 13 plan the repayment plan must be feasible — in other words, plan payments must allow ample funds for the debtor’s necessary livings expenses such as rent/mortgage payments, food, auto payments and expenses, etc.

But with all of these differences that make consolidation plans far inferior to the Chapter 13 plans they attempt to mimic, the biggest issue with them is who they are pushed on.  With a few exceptions (i.e., people with family incomes above the median income for their state) Chapter 13 is NOT the proper avenue for people struggling only with credit card debt.  Chapter 13 is, first and foremost, for people struggling with mortgage debt, have a second mortgage that is wholly unsecured, have large non-dischargeable tax debt, or other specific circumstances which a plan in Chapter 13 can specifically address.  Most people who have only credit card debt — or whose credit card debt is the main issue they are struggling with (read: the very people who debt consolidation companies target) — should not be looking at Chapter 13, but likely should be looking at Chapter 7.

Any time a client sits down to discuss their debt issues with me, I explore all of the possible options, both in and out of bankruptcy.  Sometimes it makes sense, from a strategic standpoint to attempt to settle one or more debts or explore other alternatives to bankruptcy.  However, I always give an example to my client of what a non-bankruptcy solution would likely “look like” (when it is viable) both from a recovery standpoint, a fee standpoint and a strategic standpoint side by side with one or more options in bankruptcy.  While I would not dissuade someone struggling with a debt crisis from exploring the options available from one or more debt consolidation companies, I would highly encourage anyone in such a position to also consult with a qualified bankruptcy attorney in order to truly understand all of your options.

If you are struggling with credit card debt, or other unsecured debt and thinking about calling a debt settlement company or debt consolidation company, you should also call me at 508-797-0200 or visit our contact page to schedule a free consultation so that you can fully understand your options.

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