What these companies do not tell their customers is that many creditors refuse to participate, or cooperate, with debt management agencies.

Non-participating creditors will not reduce the amount of their claim. The agency will not be able to negotiate a reduced payback amount. And, even if the creditor cooperates, the creditor can still continue to add bad information to your credit report.

Contrast this to bankruptcy:

In bankruptcy, creditors must accept the discharge of your debt, or partial payments as well as any other decisions made by the bankruptcy court. These are issues of Federal law, not just decisions made by low-level clerks making decisions for the creditor

In bankruptcy, the creditor cannot continue to contact you or try to get you to make further payments. If the a creditor continues to try and get you to pay, your bankruptcy attorney can sue them for damages and fees

Even if they agree…

Even if the your creditors agree to cooperate, there is no guarantee that you will be able to complete the program.

If you fail to complete the program, you are in a worse situation than when you started. You still owe most of the same debt and you have now paid the “service” a huge premium for doing no more than sending checks to your creditors.Debt relief programs typically charge fees of 30% of your monthly payments for doing no more than sending checks to your creditors. If you don’t complete the agency’s repayment program, this money is gone for good.

In a bankruptcy, even a Chapter 13 bankruptcy, a debtor who cannot complete the program receives approximately 90% of their payments if they fail out of the plan

It’s unlikely you will get the desired result

Debt relief companies provide little to no relief to your real needs during a financial hardship.  This is primarily because your creditors are not under any legal obligation to participate, they are not required to negotiate or settle with the debt relief agencies. Because there is no legal requirement, there are no guarantees that your situation will be resolved. The only guarantee is that you will continue to pay long after you have given the agency enough money to resolve your debt.

This means that creditors can still sue you, they can still garnish your wages, and they can keep flooding your phone with calls and mailbox with letters as long as you still owe them.

Debt relief companies also are unable to relieve any of your secured debts.  These debts include mortgages, equity lines of credit, and auto loans; none of these can be settled.

Bankruptcy solves all of these issues – providing a quick, certain process, with vast consumer protections built into the process. 

Creditors in bankruptcy are prohibited by law from contacting you, cannot sue you, and cannot garnish your wages or levy your bank accounts.  Most secured and unsecured debts can all be included in a bankruptcy.

Next we’ll discuss the Hidden Costs of Debt Relief