A large portion of my caseload at the Botelho Law Group deals with bankruptcy and consumers facing serious debt issues.  Often times we turn to the Bankruptcy Court to achieve relief, but prior to doing so it is important to discuss with my clients the alternatives to bankruptcy along with their “pros & cons”.  By reviewing various different strategies we are able to determine what is in the client’s best interests as well as which legal road will lead to the very best chances of reaching that particular client’s goals.  In this post I will give some basic information concerning debt settlement and debt management as alternatives to bankruptcy.

You have likely heard commercials on television and radio from companies or law firms claiming to be able to help with your debt while keeping you out of Bankruptcy Court.  Two very common techniques are debt settlement and debt management.  For the most part the media and individuals who are not well versed in this area of law very often confuse the two concepts and misspeak by using them interchangeably.  (In fact I recently heard a Judge refer to a debt settlement issue as “debt consolidation”.)  While the two methods of achieving debt relief and avoiding bankruptcy are different, they are similar in the sense that they are used to remove unsecured debt.  That means these methods should not be used when there is collateral involved such as a car loan or home mortgage.

Most debt management firms attempt to reduce your interest rates and late charges to help you afford to pay back the debt.  In essence, it is a sort of restructuring of the debt in a manner that gives you some breathing room and allows you to get caught back up while attempting to avoid bankruptcy.  The consumer likely pays more money back to the creditors using this approach but there are very likely fewer risks involved as compared to debt settlement.  A benefit to debt management is that while you make regular timely payments the creditors will be reporting such to the credit bureaus and depending on your particular credit history this might improve your credit score.  A downside to this approach is that if you cannot keep up with the payments it will not be feasible to get caught up with the debt and you are basically back to square one.

Debt settlement firms on the other hand take a much more aggressive approach.  During a debt settlement strategy the consumer stops paying the unsecured debts.  Instead they pay a certain amount to the firm that saves the money in an escrow account.  After enough money is saved they try to negotiate deals with the creditors.  The goal is to work out settlements that will save you money and keep you out of bankruptcy.  In many cases this process takes a relatively long period of time, as creditors are more likely to settle when they haven’t been paid for multiple months in a row.  The main risks associated with debt settlement is that your credit score will be harmed and there is a possibility that while money is being saved to work out deals the creditors have the right to obtain a lawyer begin a  lawsuit.  It is nearly impossible to determine if a particular creditor will sue a client, but it is a risk that should be disclosed by all debt settlement firms prior to engaging in this strategy. Another important caveat associated with debt settlement is that whatever debt is forgiven by the creditors will be viewed as income in the eyes of the IRS.  This means that if you have a credit card with a balance of $10,000 and a deal is made for paying only $5,000 the difference of $5,000 will be taxable as income, the same way your regular wages are.

If you are considering using debt management or debt settlement to seek relief, please be careful with whom you trust to help you out of debt.  Both of these methods may be a way to avoid bankruptcy but a quick search online leads to many horror stories of scam artists praying upon those who are stressed out and desperate for help.  It is imperative to do some research on the firm that is promising to get you results.  Also, if you are speaking with a bankruptcy lawyer who does not answer your questions regarding alternatives but rather is trying to sell you on bankruptcy, you should consider if he or she has your best interests in mind or is merely trying to get another bankruptcy client.

An important note to point out is that there is no “one size fits all” solution to debt troubles.  There are many factors that go into determining what legal strategy should be taken.  Our firm offers free consultations where I will go over your particular set of facts and analyze not only bankruptcy but other alternatives such as debt settlement and debt management.
Joseph F. Botelho, Esq.

Attorneys At Law

901 Eastern Ave.
Unit 2
Fall River, MA 02723

Office:  888-269-0688

Email: jbotelho@botelholawgroup.com


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