Filing Bankruptcy After a Failed Debt Settlement Effort

Debt settlement programs are springing up more and more as Americans are facing increasingly difficult financial hardships. Loss of income, medical debts, credit card bills, mortgage problems, divorce and many other financially strenuous issues are forcing people to sign up for help from debt settlement companies that promise to eliminate debt for "pennies on the dollar". Unfortunately, many would be debt settlers are finding that many of these companies don't offer all that they promise.

Debt Settlement in the Real World

The way a debt settlement company works is to accept a monthly payment from a client who would otherwise make that payment to a creditor. During this time, the debt settlement company is supposed to add the funds into a trust account where it can collect interest until there is sufficient cash to offer up a lump sum payment in return for a release of the debtors liability. Of course, during this time, the debt settlement company collects their fees first, while the clients creditors go for months without payment.

Unfortunately, it doesn't always work. Creditors are not bound by any law to accept the payment, and in many cases, file lawsuits against the debtor for non-payment.

Bankruptcy

Unlike a debt settlement effort, filing for bankruptcy offers debtors legal protection from the US court from creditor lawsuits, collection attempts, foreclosure, and any other type of debt collection or civil suit effort. Once the bankruptcy petition is filed, creditors are legally barred from making any attempt to reclaim property, foreclose on real estate or file suit by the bankruptcy automatic stay.

Further, creditors are legally forced to accept whatever outcome the petitioner, his/her attorney and the bankruptcy court decide. In most cases that means unsecured creditors have to accept little or no payment, and the liability for that debt is permanently erased.

Bankruptcy After Debt Settlement Fails

The worst part of this all too common scenario is that, had the distressed debtor considered bankruptcy in the first place, he or she would have skipped the many months of dealing with creditor lawsuits, and would likely already be back in financial shape, rebuilding their credit and their life after getting the "fresh start" promised by the US Bankruptcy Court.

Always Talk to an Attorney

It's important that a debtor facing real financial hardship talk to an attorney before making choice to turn to a debt settlement company. An attorney is bound by ethical laws to provide real solutions that are in the best interest of their client. Additionally, most attorneys can offer both debt settlement services for those whose situation calls for it, AND bankruptcy when that is the best choice.

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