Ask a Bankruptcy Attorney: Can a Debt Settlement Company Help Me Avoid Bankruptcy?

Q:  I keep hearing about debt settlement companies.  Are they a legitimate way to avoid bankruptcy? – John L.
A:  I have not found any evidence that debt settlement programs are a legitimate alternative to bankruptcy.  I find them risky and deceptive and prefer to recommend alternatives which give you legal protection from creditors.  Lately, I can’t turn the TV channel without someone trying to sell me on a debt settlement plan.  As a bankruptcy attorney, I witness first hand the effects of failed debt settlement plans.  The complaints usually start with “Well, I got involved with this company that was supposed to settle my debt…”.  After that, the stories are sadly all the same.  The company never settled the debts and now the person is being sued.
If you are considering a debt settlement company keep these things in mind:
Built to Fail?
According to a 2010 Government Accountability Office report which compiled data from the Federal Trade Commission and 43 state attorneys general, more than 90% of debt settlement plans fail.  This documented fail rate was disputed by some company representatives who claimed a suspiciously high success rate between 83 and 100%. The FTC’s data, however, demonstrated that the high failure rate was in part due to substantial up-front fees required to be paid to begin the plan.
You are still responsible for payments on the debts even though they are in the plan.
Some debt settlement companies will try to convince the consumer that they no longer have to keep paying on the debts included in the plan.  Although you have a relationship with the debt settlement companies, the creditors do not.  By not continuing to pay the monthly payments, your debts will go into default and you may be sued for payment.  Your debt settlement plan does nothing to erase your legal obligation to remain current on your payment obligations.
Don’t be fooled by “official” language.
A number of companies have been sited for misleading the consumer into thinking the programs were sponsored by or implemented by the federal government.  Using advertising slogans such as “National Debt Relief Stimulus Plan” or “New Government Programs”, the companies falsely try to align their company with the government to entice the consumer to join, even though no such relationship with the government exists.  Some states, like Arkansas and Wyoming have gotten so fed up with the abusive practices of debt settlement companies that they have chosen to ban them operating in their states.
But, hey, who knows?  Maybe you will get lucky.