There is a place on Coney Island Avenue that provides “Debt Settlement Services”. I don’t know the company, and I don’t know the people who run the company. But I would imagine the business model of the company and the like goes something like this: “If you’re in credit card debt over $5,000, call us and we can negotiate with your creditors and save you THOUSANDS in interest and late payment fees.” I can guarantee that within the next few years, the neighborhood will be inundated with even more places like it. Again, I am stressing that I don’t know the people who run this place. What I can tell you, in my opinion, is that debt settlement as a business model is a complete and utter ripoff that has caused people to lose millions of dollars – and they usually have absolutely nothing to show for it.
First thing’s first. Lets deal with the elephant in the room. My main practice, along with real estate, is bankruptcy. Business, unfortunately, is good. People are falling on tough times all over the neighborhood, and it’s not just the blue collar workers that you stereotypically think of. I’ve had many clients in Sheepshead Bay come to me to file bankruptcy who earn six figures and who had considerable assets. So if anyone wants to question my motive in this, that’s fine and thats your prerogative. But I’ll go further in hopes that you realize I am saying this not out of some desire for business, but because facts are facts no matter how you cut it.
If someone doesn’t want to file for bankruptcy for whatever reason (considerable assets, emotional feelings, etc.), that’s fine. But I would rather have that individual negotiate directly with their creditors than ever deal with a company involved in debt settlement. In fact, I would be more than willing to sit down with anyone at all, client or not, and prove that debt settlement is a complete and utter waste of time and resources.
The facts: debt settlement companies typically charge 10 to 15 percent of your credit card balance up front to get “started.” So let’s say you’re the average person who has $30,000 in credit card debt (remember they include interest and late fees to calculate the fee, not just principal.) Get ready to fork over up to $4,500 just to get the ball rolling. What’s next? Your monthly maintenance fee of $100 or so. What’s that for? I have absolutely no idea whatsoever. None. I don’t know what accounts they’re referring to or what they’re maintaining. In any case you’re now paying about $6,000 in your first year just to get started. So for someone who makes, say, $60,000 a year, you just forked over 10 percent of your annual GROSS income to get started and you haven’t even gotten rid of one debt yet.
So now you signed up (and by the way you’ll likely sign a contract when you do), what’s next? Well, and this is the absolute absurdity of it, you do nothing. Thats right, nothing. You stop paying all of your credit cards and you start putting this money aside in a segregated bank account. And when the debt settlement company decides, based on what they claim is “experience with the creditor” that you’re ripe to settle, they make a settle offer. What happens if the creditor doesn’t accept? Beats me. The debt settlement company will say that you just have to save more. So you’re saving more in this segregated account (and now you’re paying more in maintenance fees). And, by the way, what of your four or five other credit card accounts that are delinquent? Those are waiting in the wings for you to save more money after figuring out what the first creditor would settle for and after continuously paying account maintenance fees to the debt settlement company. But do they wait calmly and patiently? No, they harrass you all day with phone calls to your house, work, neighbors, etc. Can the debt settlement company stop them? Nope. And then after about 90 days or so they sell or assign the debt to a law firm like Mel S. Harris & Associates, Rubin & Rothman, Pressler and Pressler, and a few others. Then those lawyers sue you. Does the debt settlement company represent you in the suit? Well no, but for some additional money they can hire an attorney for you. And what happens if you can’t afford an attorney? The creditor gets a judgment and can freeze your bank account or garnish your wages. And if you can afford an attorney but cannot afford to settle based on the amounts they’re requesting? The exact same judgment.
So now you have no money to pay creditor #1 back or to pay your account maintenance fees. You also can’t pay back any of the other creditors who have a judgment against you. And you’re now about $7,000 or so in the hole. This isn’t hyperbole or exaggeration. This is one of the absolute worst financial scams running rampant in communities, and it’s only growing larger. You see the ads on tv, and you hear them on the radio. They’re inundating everything and that gives you the false impression that what they do actually works, when it really almost never does.
If you do about 30 minutes of research on Google as to the best techniques to use when dealing with creditors, there will be absolutely no differentiation between the knowledge you have and the knowledge your debt “counselor” has. Your debt counselor was likely a receptionist or a sales executive a few years back. They don’t go to school for this. If you don’t want to file for bankruptcy that’s fine, but avoid these companies. If you had the money in the first place you wouldn’t be in this much debt. There is absolutely no reason whatsoever to spend more for a service you can do on your own.
You’ll also hear about the so called “Not for Profits” out there. Fun fact: The IRS took on this issue in 2006 after receiving a myriad of complaints from people who used credit counseling services. The result? “To date, the audits of 41 organizations, representing more than 40 percent of the revenue in the industry, have been completed. All of the completed audits have resulted in revocation, proposed revocation or other termination of tax-exempt status.” ALL of the companies lost their status. As crazy as it sounds, score one for the IRS here. You know who else has caught on? The New York Attorney General. The moral of this ominous story is before you walk into any place in Sheepshead Bay that promises to reduce your debt by up to half, realize that there is something inherently wrong in the business model. You’ll save yourself a bunch of money in the process.
This does not constitute legal opinion, simply general advice.
Daniel Gershburg Esq., is a real estate and bankruptcy attorney with offices in Sheepshead Bay and Manhattan. The practice was specifically set up to change the way people view attorneys, by incorporating radical ideas like calling people back quickly, returning emails, giving clients ’round the clock access to their cases and charging low fees. For more information please visitBrooklyn Real Estate Attorney Daniel Gershburg