Debt Settlement Programs Don’t Keep Credit Card Companies from Suing You

Private Debt Settlement Does Not Stop LawsuitsOnce or twice a week, I meet with a prospective bankruptcy client who has called us, frantic, because a credit card company or some third party collection bullies for a credit card company have served her with a lawsuit summons. “I don’t understand why they would sue me,” the debtor will complain. “I’ve been paying the debt settlement company $500 a month for the last year. I thought they were supposed to be working something out with my credit card company.”

Yes, well, you know that debt settlement company you’ve been paying? Uh, they have about as much leverage in negotiating something with your credit card company as I would in convincing North Korea to sit down to multi-party talks to end their nuclear program. Private debt settlement companies—those squawk box guys on daytime TV that tell you “don’t even think about bankruptcy”—have zero power to stop your credit cards from suing. In fact, the first thing they will tell you is to stop paying your credit cards. That’s because credit card companies have no incentive to settle anything with you if you are current on making your minimum payments. Be that as it may, this doesn’t mean that your credit cards and other creditors will agree to any settlement proposed by the so-called debt settlement companies. Instead, your creditors often get impatient when they haven’t received anything for months, and go forward with their legal remedy against you, which is to sue you.

Private debt settlement outfits are fond of claiming magic settlements for pennies on the dollar that they have dubiously achieved for … who knows, somebody, somewhere, sometime.

What I can tell you is that just like private arbitration is designed to deny workers and consumers recourse to judicial process, the debt settlement companies are essentially designed to discourage consumer debtors from getting the maximum debt relief they might get under Bankruptcy law. Bear in mind that about two thirds of consumer debtor bankruptcy cases filed in the Northern District of California, where I practice, are Chapter 7 cases in which the debtor doesn’t pay anything to her unsecured creditors (like credit cards, medical debt, or home equity lines on an already foreclosed home). Private debt settlement always involves paying something—whether you can reasonably afford to or not. You see, we already have a system for dealing with debts that people can’t afford to pay. It’s called Bankruptcy, and, while it may have gotten more friendly to creditors with the 2005 BAPCPA bankruptcy law changes, it still affords a series of protections for debtors that simply do not exist outside of bankruptcy law.

First and foremost, when a person files for bankruptcy protection, either under Chapter 7 or Chapter 13, he immediately enjoys the protection of the Automatic Stay. The Automatic Stay prevents nearly all creditors from taking any action to collect a debt while the bankruptcy case is pending, unless the Bankruptcy Court specifically grants them permission to resume their collection activities under a Relief from Stay motion.  That means, no foreclosure, no eviction, no continuing civil law suit proceedings, no repossessions (with the exception of purchase money car loans that are not reaffirmed by the debtor).  And they can’t sue you. Not while you’re in bankruptcy.

So, why would anyone choose private debt settlement over bankruptcy? While there are some people that bankruptcy cannot help, the answer in most cases is simply that the banks, credit card companies, and other rich, powerful institutions in our society have tried to teach people to feel ashamed of seeking the protection of bankruptcy.  As I tell every new client, “there is no shame in availing yourself of the protections afforded by bankruptcy law. This is a business decision, not a moral one. Do you think General Motors feels ‘shame’ for having filed bankruptcy?” I didn’t think so.

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