With the New Year quickly approaching, Americans can expect to be bombarded by phone calls from debt settlement companies offering them a way out of debt. Because bankruptcy filing carried a negative stigma in the past, most people try to opt out and look for an alternative to bankruptcy. These folks are prime targets for the debt settlement industry. A lot of the negative press about those filing bankruptcy, comes from the credit industry and the debt settlement companies. The majority of what they call facts are only partial truths at best. Looking at it from their standpoint, they believe if they can scare people into not filing bankruptcy that is all the more money that they will get paid back. What they don't want the individual to know is if they file Chapter 7 bankruptcy they will get nothing, nada, zip. This is why many debt collection companies get militant when they know that debtor is on their last leg. The sad thing is, they know this individual could not afford to pay them anything and yet they would rather see little Johnny go without dinner just so they can squeeze another dime out of this broke individual.
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Why debt settlement is touted as being better than a bankruptcy filing is because they say that they can settle all your debts for pennies on the dollar without having to file for bankruptcy. The problem is they can't promise anything because the creditors are holding all the cards. How debt settlement works is they have the debtor make payments to the company to build up a pot of money for them to negotiate with the individual's creditors. Since the creditors hold the cards and the debtor is giving the money to the debt settlement company instead of the creditors they have the option of suing the debtor. Now that the credit card is in default, the interest rates and late fees go through the roof. If the creditor sues the debtor and gets a judgment, the creditor will be able to garnish their wages and attach any property that the debtor owns.
I don't know how they believe that this is a better solution than filing for bankruptcy. First of all, with a bankruptcy the debtor is protected by the automatic stay once the petition is filed with the court. The creditor will no longer be able to collect on the debts. In fact, the automatic stay stops all phone calls, foreclosure, lawsuits, judgments and wage garnishments. If they want to contact the debtor about the bankruptcy filing, they will have to do it through the bankruptcy attorney. This puts the power in the hands of the individual filing for bankruptcy. Not only will the debtor be able to stop making payments to the creditors, all past debts and late fees will be wiped out in the bankruptcy discharge. Another thing that the debt settlement companies strong arm the debtor is by telling them that bankruptcy filing will destroy their credit. Once again, a partial truth because the debtor's credit was already soiled by all the late pays. In fact, when a person settles their debts instead of bankruptcy, it will show up on their credit report as a charge off, showing that the debtor did not pay off the debt in full. This dings the credit just about as bad as a bankruptcy. Typically, after filing for bankruptcy, most individuals rebuild their credit quickly because they're debt ratios are good and many leave bankruptcy being virtually debt-free.
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