Debt Settlement Can't Protect You from Being Sued by Credit Card Companies

While debt settlement programs may offer you a way to manage debt, only bankruptcy offers protection of the U.S. Courts.

Updated by , Attorney

Many people often turn to debt settlement or debt consolidation agencies in a good faith attempt to pay back their debts. These agencies offer an alternative to filing bankruptcy by making promises to settle your collective debt for pennies on the dollar. The fact is, these debt settlement agencies do not have the power to settle your debt, and many people find themselves sued by their credit card companies despite working with a debt settlement agency.

How Debt Settlement Firms Operate

Debt settlement or debt consolidation companies provide people with a false sense of security. They are essentially bill collectors by another name. The way they operate is to ask you to pay them a set sum every month, say $500.00. They will also tell you to stop paying their credit card bills. They do this because if you're not behind on your payments, the credit card company has no incentive to settle your debt.

So, while you're racking up additional fees and interest (not to mention ruining your credit) because you haven't been paying on your credit cards for months, your credit card companies are gearing up to sue you.

All the while you're paying $500.00 per month to the debt settlement agency. And for what? Many people falsely believe that the monthly fee that they're paying goes to their credit card companies. In fact, the debt settlement agency may not even have any contact with the creditors at all for months until they believe they have enough of your money to start settlement discussions.

Creditor Lawsuits

When the credit card companies finally begin to sue, you're left to deal with it. The $500.00 that you've been paying every month may be gone. Most people who turn to debt settlement agencies have a better alternative: Bankruptcy. Bankruptcy law already provides honest debtors with a way out of their debt and builds in a number of powerful protections for debtors from their creditors.

The Bankruptcy Option

If you find yourself in a situation where you simply cannot afford to pay your debt; whether you've been laid off, suffered a decrease in pay, suddenly have to take care of an elderly or sick family member, or for any number of other reasons, bankruptcy may offer a far more comprehensive way out of debt than private debt settlement.

Chapter 7 Bankruptcy

For those who qualify for Chapter 7 bankruptcy, it is an option that can relieve debtors of all, or nearly all of their unsecured debt (credit cards, medical bills, or home equity lines on an already foreclosed home). This means that once your debts have been discharged in bankruptcy, you no longer have an obligation to pay those debts. What this also means is that once the debt has been discharged, the credit card companies can no longer sue you to collect that debt. Ever.

For more information on this common type of bankruptcy, see our topic area on Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is another option people may have as an alternative to a debt settlement program. Chapter 13 bankruptcy is a repayment plan overseen by the bankruptcy court. Those involved in chapter 13 bankruptcies may pay a portion of their credit card and other debts back, but the credit card companies cannot sue while the debtor is making manageable monthly payments. This is because those who file bankruptcy enjoy the protection of the Automatic Stay of bankruptcy.

To learn more about Chapter 13, check out our section on Chapter 13 Bankruptcy.

The Automatic Stay

The Automatic Stay prevents any creditors from taking any action to collect a debt while the bankruptcy is pending (unless the creditor files a motion for relief from the stay, which must be specifically granted by the court). The automatic stay can stop most wage garnishments, foreclosure proceedings, repossessions, and even IRS collection actions (temporarily).

Learn more about how the automatic stay works.

Bankruptcy cannot help everybody; but for those who qualify, it is a prudent and safe way to deal with mounting debt. Unlike using debt settlement agencies that offer empty promises with no certainty of a resolution to financial woes, filing bankruptcy is a real and effective solution. It provides a fresh start for those who really need one.

To learn more about making the bankruptcy decision, check out our section on, "Should I File for Bankruptcy?" and, "Dealing With Debt".

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