I received an interesting email yesterday from one of the Chapter 13 Trustees with whom I work.

It seems that a debt settlement company by the name of First American Debt Solutions (FADS) of Deerfield Beach, Florida, is mailing solicitation letters to Chapter 13 bankruptcy debtors across the USA. In the letter, FADS blatantly lies to the debtors by telling them that their Chapter 13 case has been dismissed when it hasn’t. And I’m sure that it won’t surprise you that FADS then encourages the panicking debtors to call none other than FADS itself to discuss how FADS can help the debtors to resolve this terrible situation.

If you’re a Chapter 13 debtor who has received such a letter from First American Debt Solutions, please don’t fall for this trickery. Instead, contact your bankruptcy lawyer or your Chapter 13 trustee and provide them with a copy of the letter.

If you’re a bankruptcy lawyer, check with your Chapter 13 clients to see if they have received such a letter. If not, warn them to be on guard and to advise you should they receive such a letter in the future.

Hopefully the Department of Justice’s U.S. Trustee Program will be able to put First American Debt Solutions out of business for good real soon.

Debt settlement, also known as debt negotiation and debt arbitration, is a process through which a creditor accepts less than the full amount owed yet considers the balance as paid.

If you listen to the radio or watch TV even for a brief amount of time, you’re likely to hear an advertisement for “easy debt settlement.” This is because dozens of companies offering “easy debt settlement” are blanketing the airwaves 24 hours a day with their misleading ads.

Some of the ads that I have heard recently state that “if you owe at least $10,000.00 in unsecured debt, you have the right to settle your debt for at least 50% of what you owe.”

This is simply not true. There is no law that requires creditors to settle debts for less than is owed.

Unfortunately, many people believe that because it’s on TV or radio, it must be true. So they sign up with these debt-settlement companies, believing that they’ll be able to easily settle their credit card debts, payday loans, and other unsecured debt for fifty cents on the dollar.

Debt settlement companies tell their customers to stop paying their creditors and not to talk with their creditors — to leave this to the debt-settlement company. Usually the debt-settlement company claims it has negotiated a debt-reduction settlement with the creditor, but the customer has no way of verifying this because he/she has agreed not to contact the creditor.

Then the debt-settlement company sets up a payment plan into which the customer pays what can be a sizeable amount each month. Unknown to the customer, the first few months of his/her payments go to pay the debt-settlement company’s fees and not to paying the creditors. This results in the customer becoming delinquent with the creditor, negative information being placed on the customer’s credit report, and the debt grows larger as interest and late charges are added to the account.

I have a number of bankruptcy clients who saw or heard these debt-settlement commercials and believed that it would be an easy way to get out of debt. So they signed up and started paying a huge monthly payment to the debt-settlement companies instead of paying their creditors what they owed. Unknown to my clients, the debt-settlement company wasn’t paying that money to the creditors. So my clients were falling farther behind and before long were being sued and having their pay checks garnished.

My clients actually would have been better off had they just continued to pay what they could directly to their creditors.

Or if they really thought debt settlement was the best solution to their debt problems, they should have negotiated directly with their creditors, not through a debt settlement company.

A person has the ability to negotiate a debt settlement on his/her own. You don’t need a debt-settlement company.

In fact, I recently filed a bankruptcy for a lady who had negotiated some good debt settlement agreements all by herself on several of her credit cards. Unfortunately, not all of her credit cards were willing to negotiate so she ended up having to file a Chapter 7 bankruptcy.  The credit cards that were willing to negotiate in good faith got a sizeable chunk of what was owed them; the credit cards that weren’t willing to negotiate got absolutely nothing.

As the economy weakens, a growing number of consumers are paying big money for services from debt settlement companies that claim to be able to settle debts for a fraction of what is owed. However, the truth of the matter is that most customers end up regretting their decision to work with a debt settlement company.

The number of consumer complaints about debt settlement companies is skyrocketing, says John Ulzheimer, president of consumer education for Credit.com.

The Federal Trade Commission has also begun to investigate debt settlement companies because many of the companies have misled consumers about what services they could deliver, how long it would take and how much it would cost.

Debt settlement companies usually charge hefty up-front fees, and their tactics can worsen consumers’ credit scores and leave them in greater debt than when they started.

The companies often charge an up-front fee of 10% or 15% of the total amount owed. They may also charge monthly fees of about $50, and a back-end fee of about 20% or 30% of the amount “saved” for clients in a settlement.

Debt settlement companies generally advise their clients to make monthly payments into a special account instead of paying creditors. The companies promise to use the accumulated cash to settle debts for pennies on the dollar. But in the meantime, creditors aren’t getting any payment, so interest and late fees accrue, debt rises and consumers get a steady stream of calls from creditors and collection agencies. They may even be sued and have their wages garnished.

Consumers in debt-settlement plans often see their credit scores tank. While they’re not making payments, of course, their scores will drop. But settling a debt for less than the amount owed is also “a serious negative on your credit score” and stays on your credit report for seven years, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which developed the widely used FICO credit score.

Debt settlement can also increase a consumers’ tax bill since income tax must generally be paid on the amount of debt forgiven in a settlement.

A recent Wall Street Journal article on debt settlement companies told the story of several consumers with high credit card debt who thought they were doing the right thing by signing up to work with debt settlement companies. However, instead of things getting better, they got much worse for these people. The harassing phone calls from bill collectors increased, followed by law suits being filed by the credit card companies who then garnished their pay checks, all of this causing their credit scores to plummet. One of the profiled consumers wrapped things up by saying “I wish I had filed bankruptcy to begin with. I’d have been much better off.”

Be sure to read my two other recent posts on debt settlement companies: “The Truth About Debt Settlement Companies in Oklahoma” and “5 More Reasons to Avoid Debt Settlement Companies.”

If you are struggling with debt problems and being harassed by bill collectors and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation. I would count it a privilege to be able to visit with you in a relaxed and confidential environment where I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.

Recently I wrote a warning post for Oklahoma consumers called “The Truth About Debt Settlement Companies.” I talked about the flourishing “debt settlement” industry which is filled with unscrupulous companies whose standard practice seems to be lying about what they can actually do for consumers and misrepresenting how high their fees really are. The federal government is actively investigating many and suing some of these debt settlement companies for falsely promising easy debt relief that left many consumers deeper in debt and sometimes forced them to file for bankruptcy protection.

A recent article from SmartMoney.com discussed five more reasons that you should avoid working with debt settlement companies:

1. They charge extremely high fees,
2. Many of your creditors will refuse to work with them,
3. Your chances of getting sued increase,
4. Your credit will likely end up in worse shape, and
5. You have better options available.

Of course, the debt settlement companies will not tell you these things. Why should they? They’re more interested in signing you up and getting your money than helping you get out of debt an d regain your financial freedom.

Be sure to also read my recent post “The Truth About Debt Settlement Companies in Oklahoma.”

If you are struggling with debt problems and being harrassed by bill collectors and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation. I would count it a privilege to be able to visit with you in a relaxed and confidential environment where I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.

Today I received an email from a lady who has been working with a “debt settlement company” for about 6 months. She told me that she has paid a considerable amount of money to this company but so far she has received nothing in return. Unfortunately, this is an all too common story.

TV and radio are filled with ads from these debt settlement companies promising quick debt relief. They say they can negotiate deals with your creditors where you end up paying only pennies on the dollar and your creditors consider the balance paid in full. It all sounds great but unfortunately it’s too good to be true. In fact, it’s nothing but a lie, a scam, a rip-off.

Here are the two main things to be aware of regarding debt settlement companies:

1. they will charge you a lot of money, and
2. they will end up hurting your credit.

Debt settlement companies have two basic fee structures: fees of up to 20% of your total debt or fees of up to 35% on the amount of debt reduction they can negotiate. Many also charge a monthly fee up to $90 per month.

Debt settlement companies also give bad advice which ends up lowering credit scores. They will tell you to stop paying your creditors and begin depositing money in a special account while they negotiate with your creditors. Usually what happens is there is no real negotiation going on and all the while your creditors are charging you various late fees and penalties because you have stopped paying them. So you wind up owing more than when you started and your credit suffers as failure to make payments on debts comes to the attention of the three national credit reporting bureaus.

A recent Tulsa World article on debt settlement companies had this advice – “run away” as fast as you can.

A Washington Post article details how the federal government has sued several unscrupulous credit-counseling and debt-management firms including AmeriDebt, the National Consumer Council, Debt Management and Better Budget. The companies were falsely promising easy debt relief that left many consumers deeper in debt and sometimes forced them to file for bankruptcy protection.

If you are struggling with debt problems and being harrassed by bill collectors and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation. I would count it a privilege to be able to visit with you in a relaxed and confidential environment where I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.

The following is a guest post authored by my friend and colleague Carl H. Starrett II, a consumer bankruptcy attorney in San Diego, California.

As the economy continues to worsen, businesses offering credit counseling, debt management and other “quick fix” plans continue springing up to offer debt relief services to consumers. A colleague forwarded me a blog article from an organization called Debt Warriors entitled “7 Facts That The Average Bankruptcy Lawyer Will Not Tell Debtors”. Author J. Carlton Ford describes himself as a “former Legal Assistant in a Bankruptcy Prevention Law Firm”. He is also a sales associate for Pre-Paid Legal Services, Inc. It is not clear whether or not Mr. Carlton is in fact a licensed attorney. However, it appears he is not.

Debt Warriors purports to offer to teach consumers how to stop creditor harassment and eliminate their debts without filing for bankruptcy. Based on misinformation contained in the article about “average” bankruptcy attorneys, I would seriously question the value as well as the credibility of the services offered by Debt Warriors. As the old saying goes, “if it sounds to good to be true then in most cases it is simply not true.”

Mr. Ford is unclear on what he believes is an “average” bankruptcy attorney. Of course, if Ford is not an attorney himself, so it would be difficult for him to evaluate licensed members of the bar. I have been in practice for more than 15 years, representing both creditors and debtors. I have limited myself to representing consumer debtors since 2005 and I am a member of the National Association of Consumer Bankruptcy Attorneys (“NACBA”). So far this year, I have helped my clients discharge more than $3.7 million of debt in Chapter 7 bankruptcy cases. I have no idea if Mr. Ford would consider me to be an “average” or “typical” bankruptcy attorney, but I offer the following responses to the “facts” about bankruptcy that “average” attorneys allegedly hide from their clients:

1. Ford Claims that Bankruptcy is Not Easy to File. Bankruptcy has never been “easy” to file. It is complex and difficult in many cases, which is exactly why every consumer needs an experienced bankruptcy attorney. Ford then goes on to make the nonsensical statement that Congress eliminated Chapter 11 from the Bankruptcy Code with the 2005 Amendments. Besides being a completely untrue statement, Chapter 11 is meant for large businesses to restructure their debts. It is very rare that a consumer debtor would even file a Chapter 11 case. However, some individuals must file for Chapter 11 relief because of the amount of the debt they owe. Chapter 13 is available for the “average American wage-earner” so the debt limits for Chapter 13 relief do not apply to high-income wage earners and individuals with substantial and significant secured and unsecured debts.

2. Ford Asserts that Consumers seeking Bankruptcy Protection have to take a ‘Means Test’. The 2005 Reform Act does include a financial means test for consumers who seek to discharge their debts under Chapter 7 or repay their debts under Chapter 13. Of course a bankruptcy attorney would discuss the means test with a potential client. It is the most highly publicized change from the 2005 Reform Laws and the most burdensome change to debtors. However, it is not a “test” like a true-false exam in high school. It is a historical analysis for the consumer’s average monthly income for the 6 months before the bankruptcy case is filed, not including the month in which the case is filed. It is somewhat like filing out a tax return. The bankruptcy attorney is the one who completes the form based in the payroll and tax records provided by the consumer and income from other sources. A consumer debtor cannot file for bankruptcy without completing the means test analysis form. But, it is a form, and not a test.

3. Ford Claims there is a Presumption of Bankruptcy Abuse By The Debtor. The author seems to be discussing the financial criteria of the means test: “Did you know that if a Consumer has income of over $100 per month (after deductions) and they seek Bankruptcy Protection, that Consumer may be ‘Presumed’ guilty of Bankruptcy Abuse? The average Bankruptcy Lawyer will not inform you of this fact.”

This statement by the author is utter nonsense. Mr. Ford to be referring to the financial criteria of the means test. If a consumer debtor “fails” the means test, then it might be a presumption of abuse for them to file for Chapter 7 bankruptcy. In such cases, the debtor might need to file for a Chapter 13 repayment plan and pay back a small portion of those debts. Or, the debtor may be able to claim “special circumstances” that would negate the presumption of abuse and proceed with the Chapter 7 case. The bottom line is that a bankruptcy attorney cannot “hide” the means test from a debtor and in fact completes the form for the debtor.

4. Ford Claims that Consumers Seeking Bankruptcy Protection Must Wait 180 Days (6 Months) Before Filing. This statement is simply false. Prior to filing for bankruptcy, a consumer debtor must take an approved class in credit counseling and file their certificate of completion with the court when filing their bankruptcy petition. The class must be taken within 180 days before the filing date of the debtor’s bankruptcy petition. There is no requirement to delay filing for bankruptcy. The only limitation on the credit counseling is that you cannot take the course and then file for bankruptcy the same day you complete the course. But, the 180 Rule as stated by Ford is simply false.

5. Ford then Claims that Bankruptcy Filers Must Seek Accredited Credit Counseling Before Filing. Of course an attorney would mention this to a potential bankruptcy client. If a consumer debtor does not take the class, the court will dismiss their case. Not only do I mention this class to my clients, I arrange for them to take it! The filing of a certification from the counselor and a sworn statement from the debtor is an essential part of the bankruptcy court filing and as noted the case will be dismissed without these mandatory documents. The class is not an embarrassing or burdensome task. In most cases, debtors may take the class in the privacy of their own home via the Internet or over the phone. The classes generally take up to 90 minutes to complete.

6. Ford Claims Bankruptcy Is Now More Difficult and More Costly To File. Yes, bankruptcy is more difficult and expensive to file than before the changes made by the 2005 Reform Law. That fact is certainly no secret to the public. Before I accept money from a client, we discuss the fees and I provide them with a signed fee agreement that contains all of the disclosures required by the Bankruptcy Code.

7. Ford Claims that Pre-Paid Legal Attorneys Are Way Above Average. Maybe Pre-Paid Legal attorneys are above average. I have nothing neither good nor bad to say about them. I do know that customers of Pre-Paid Legal only have one provider law firm to choose from in the entire state of California. You have very few options if you are unhappy with the provider law firms.

In the final analysis, Mr. Ford’s article is nothing more than a biased and inaccurate attempt to promote his Pre-Paid Legal Services Plan and his questionable debt negotiation services while perpetuating blatant and outright false myths about the benefits of bankruptcy. If you are a debtor in need of guidance regarding debt problems, consider using the attorney search function on NACBA’s website to find a qualified local bankruptcy attorney. Members of NACBA are far more qualified to advise debtors regarding then debt relief options than a former paralegal promoting service of dubious value. The NACBA website is www.nacba.org. The American Bankruptcy Institute (www.abi.org) also includes a substantial amount of material on consumer bankruptcy law under their “Consumer Bankruptcy Center” link. Finally, the National Association of Chapter 13 Trustees has a website for consumers seeking Chapter 13 information (www.nacttacademy.com).

Source: Legal Tips & Commentary by attorney Carl H. Starrett II.