Should Debt Payments be Suspended

Debt Consolidation or Bankruptcy?

What is the real difference between debt consolidation and bankruptcy?  They both affect your credit score in a negative manner, which is the correct choice when a person can’t afford to pay their credit card debts or other liabilities?

Debt consolidation is most often done with a third party company whose goal is to compromise the face amount of the debt, to enable settlement with creditors for usually about fifty cents on the dollar (i.e., offers of payment which is 50% of the debt).  The company that facilitates the settlement charges a variety of fees that are usually about one-third of the monthly payment the client makes.  For example, a person has seven credit cards ranging from $2000 to $10,000 owing on each card.  The settlement company determines that the monthly payment is $575, the fee taken by the company could be anywhere from $175 to $200 of the total monthly payment.  These funds are usually taken automatically from the client’s bank account.  The settlement company will usually not tell you which debt they will try to settle first, but it is always the lower dollar credit cards or other debts.  For example, if paying $575 per month, $175 is their fee, after 5 months, they will have enough money in their escrow account to settle one $4000 credit card debt ($2000), or two smaller accounts.

The problem with this is that the higher balance credit cards are considering their collection options and one of those higher balance credit cards may choose to sue you, or they may let the third party company know, after months into the program and a large financial outlay, that they reject being in a settlement program with you, and the company you’ve selected.  This is the common outcome when dealing with American Express.  They seldom, if ever, participate in these settlement schemes.

So after months have gone by, the consumer often finds themself in a position where they are being sued.  If the consumer were to approach the third-party settlement company for assistance, they would quickly learn or be reminded that this company does not provide any legal services whatsoever.

It is often at this point that the client decides that he or she will need to pursue their other legal options, and they will then turn to the bankruptcy system.  Usually what a client learns is that their credit score has gone down after they stopped making payments on their credit cards, and that the bankruptcy filing does not lower the score much more, in most cases.

The attorneys at Evans Law Offices have worked for twenty-five years helping people file bankruptcy.  We file bankruptcy cases is Santa Clara, Santa Cruz, Monterey, San Benito, Alameda, San Francisco, Contra Costa counties.  The Bankruptcy Court for the Northern District is the proper court for these counties.  We also file cases for people living in the Bankruptcy Court for the Eastern District, which includes Sacramento Division, Modesto Division and Freson Division.