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The Law of Debt Relief

By Christine A. Kingston

What you don't know about the business of getting out of debt will cost you. The question you have to ask yourself is how much you're willing to pay for freedom. Quite simply the options are (1) pay it all off the usual way; (2) negotiate an amount less than you owe through negotiation; (3) consolidation; (4) debt relief payment plans; and finally, (5) bankruptcy. Certainly, if you're struggling to pay off what you owe, chances are you're in too much debt. Let's look at the costs and benefits of each of these options. We'll skip the "pay it off the usual way" because if you did this, you wouldn't be reading this article.


When we negotiate our debt, we're asking the creditor to accept less than what is owed. Say you owe $5,000.00 and you convince the company to take $2,500.00 instead. You'll pay them the $2,500.00 and then you'll get a tax bill for the other half that was written off by the creditor on a 1099 tax form.


When you take all your debts and consolidate them, you're taking out a new loan usually. When you're declined for a consolidation loan you'll need to seek other options. A new loan will pay off all the other debts and you make one payment for the terms agreed to, plus interest. This is not a plan to reduce what you owe. The average annual percentage rate (APR) on this type of loan is around 18.56%. To put that into perspective, the average range of interest rates charged on consolidation loans typically falls between 8.31% and 28.81%.

For a $30k total debt with an average interest rate of 48.56%, monthly payments would be approx. $771.00 for 60 months and total repayment would be $46, 258.00, making this the most expensive way out.


Debt relief companies are everywhere today, marketing to you to "speed up your debt-free date," and get you a payment plan that you can afford. Some of these companies have been sued for violating telemarketing rules, charging advance fees to help, and failing to inform you of your rights to your monthly payments deposited. What you're paying for here is for the company to take your monthly payment and negotiate a settlement of your debts for less than what you owe. This is a negotiation strategy with a payment plan. There will be a 1099 tax bill after these accounts are settled, so be prepared for that too. Below you'll get to pause and read that fine print that I found in an ad:

"Clients who make all their monthly program deposits pay approximately 70-75% of their original enrolled debts over 24 to 60 months. Not all clients are able to complete their program for various reasons, including their ability to save sufficient funds. Our estimates are based on prior results, which will vary depending on your specific enrolled creditors and your individual program terms. We do not guarantee that your debts will be resolved for a specific amount or percentage or within a specific period of time. We do not assume your debts, make monthly payments to creditors, or provide tax, bankruptcy, accounting or legal advice, or credit repair services. The company does not offer debt settlement services in all states and fees may vary from state to state. In some states, we may refer you to a trusted business partner that can provide you with alternative debt relief services. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution. Read and understand all program materials prior to enrollment. The use of debt settlement services will likely adversely affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors and may increase the outstanding balances of your enrolled accounts due to the accrual of fees and interest. However, negotiated settlements we obtain on your behalf resolve the entire account, including all accrued fees and interest."

This means that your savings are a nominal 25% to 30% discount on your debts after paying the company's fees and costs to maintain that account for you. In the meantime, they cannot stop the interest from accumulating, nor do they stop the creditors from escalating their efforts or even filing suit. This could increase costs over time and still cause you to land in bankruptcy. So, perhaps you can save time and money by considering the last option.


There are two chapters of the Bankruptcy Code that any person may want to file. Chapter 7 Bankruptcy is a liquidation case where you have no money to make a payment plan. The other is a Chapter 13 Bankruptcy case, which is a 5-year payment plan case. Let's compare a payment plan in bankruptcy with the plans just mentioned above.

Let's level the playing field so you have enough information to make a well-informed decision for yourself.

It's actually extremely difficult to pin down the total cost for these debt relief plans because the interest continues to grow while you're building up an account for the company to use to negotiate a discount. What's worse, is that the discount they get will likely be larger than what you'll see because there is an offset toward their fees for the service.

In bankruptcy, the fees and costs are laid out and included in the monthly payment. For that same $30k in debt, and adding in the 11% trustee fee and average $5k attorney fee, and even discounting the debt by 30% and you'll get a monthly payment of $470.00 per month for 60 months for a total cost of just $28,200.00 for a Chapter 13 case. Bankruptcy offers protection against creditors by invoking the Automatic Stay, which is an injunction that stops creditors from filing lawsuits against you or otherwise trying to collect while you're making your payments under Chapter 13 of the Bankruptcy Code. Other benefits include stopping interest from accruing on unsecured debts (i.e. credit cards), and there are no income tax consequences to debts discharged in bankruptcy. Oh, and did you know that credit scores actually improve when you're in a payment plan case? They do. How much are you willing to pay to speed up your debt-free date and do you really understand the price you'll pay?

About Christine A. Kingston

Consumer protection and bankruptcy lawyer of Surf City Lawyers representing families facing financial difficulties, burdened by debts including taxes, student loans, credit cards, medical bills, lawsuits, fallen behind on home mortgage payments, or facing auto loans they can no longer afford. We stop wage garnishments and foreclosures dead in their tracks. The firm has helped clients eliminate $1.5 million in student loan debt and helped reduce principal mortgages through the bankruptcy process. The law firm is passionate about helping clients achieve financial freedom from their debts and fights oppressive debt collectors.

Call us today to schedule your no-obligation consultation: 714-533-9210 or visit their website

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