As Debt Relief USA meets with creditors, consumers urged to know the differences between debt relief and bankruptcy

July 29th, 2009 by Mike Hinshaw

If you are considering bankruptcy protection, some recent events and posts around the Web underscore the importance of working with an established, experienced bankruptcy attorney. We’ve posted before warnings about scam companies who claim to offer some form of “debt relief” from mortgage company demands, but the same warnings also apply to consumer debt in general, particularly credit card debt.

As posted July 26 at app.com, “Debt-settlement companies typically try to negotiate with credit-card companies to reduce the amount you owe. Rising unemployment has led to a sharp increase in the number of consumers who are behind on their payments, creating a receptive audience for their services. But like a weight-loss product that causes you to gain 10 pounds, some of these programs could leave you even deeper in debt.”

Be aware that federal and state authorities have filed numerous cases “against debt-relief companies for misleading and deceptive practices.” The article mentions in particular “a Florida-based group of debt-settlement companies” who were named in a lawsuit filed by the Florida attorney general. In that case, the so-called debt-relief company allegedly told its customers “to stop sending monthly payments to their credit-card companies and send the money instead to the debt-settlement firm, which promised to reduce debts to pennies on the dollar. Instead of sending the money to credit-card companies, the lawsuit alleged, the group used it to pay attorneys’ and processing fees.”

That’s not to say all such companies are scams.

“For some borrowers with large debts that can’t be repaid within three to five years, a reputable debt settlement company may offer an alternative to bankruptcy, says Gerri Detweiler, credit adviser for Credit.com, a consumer site.”

Detweiler’s referring specifically to Chapter 13 bankruptcy, which essentially allows you to consolidate most (if not all) of your debts and pay those debts off at some reduced rate determined by the court. The trick is you need to have enough regular income to service the debt. Under Chapter 7 protection, you aren’t required to have such regular income, but significant assetts may sold off to pay back a portion of the debt. Bankruptcy “reform” legislation passed in 2005 also made it tougher to qualify for Chapter 7–but such filings are on the rise because of the financial crisis.

It’s important to understand the basics of bankruptcy because, as the article points out, “bankruptcy offers more legal protection than debt settlement: While you’re filing for bankruptcy, your creditors can’t file lawsuits or harass you.”

Regardless of whether you choose bankruptcy or debt relief, either decision should involve an attorney: ” ‘I would never suggest someone go into debt settlement unless they’ve met with an attorney, and the attorney concurs that bankruptcy may not be the best option,’ Detweiler says.”

The article, with further explanation, also mentions the most common warning signals that a company may be up to no good; here’s the highlights:

  • “The company charges a large upfront fee.”
  • “The company claims that debt settlement won’t affect your credit report.”
  • “The company claims it can protect you from lawsuits.”
  • “The company claims it can eliminate all of your debts.”

And merely because the debt-relief firm is a big company is no guarantee, either. As customers of Debt Relief USA learned last month, the company that was going to save them turned out to be unable to even save itself. Not only did the company (also known as No Debt USA) file for bankruptcy but it left clients hung out to dry by shutting down–and revealing in its court filings that it is under investigation by several states and federal authorities. The meeting of creditors was scheduled for today, so more news should be forthcoming.

The Dallas Morning News has a story here, including some comments such as the following: “[Posted by gwfunkhouser | 3 weeks ago]

‘i am on disabilty and have lost $4200.00 to dept relief usa.this is not fair.drUSA was suppose to help me, not put me deeper in dept.i beleive we should get our money back.’ ”

In that article, the company’s Web site is cited incorrectly, but you can find it here along with copies of court filings, occasional updates and a FAQ.

One final note of caution: Even if you know you’re leaning toward bankruptcy, be sure to choose an experienced bankruptcy attorney. As explained in the July issue of Wisconsin Lawyer, published by that state’s bar association, bankruptcy is something of a booming business. Now, remember, the following is addressed to lawyers in Wisconsin–not consumers, not clients:

“Many attorneys who are now handling bankruptcy cases are brand new to this area of practice. Dabbling in an area of law in which you have never previously practiced can be dangerous. Doing it in a complex area such as bankruptcy heightens the risk. Tom King is a bankruptcy trustee in Oshkosh. ‘It is never wise to get into an area without knowledge. Newly admitted attorneys, most of whom are young, benefit from working with more seasoned counsel,’ he says. Resop agrees. ‘Bankruptcy holds traps for the unwary. There is always a learning curve for attorneys to know the written rules and the unwritten rules of practicing bankruptcy. The bankruptcy court and bar are supportive of their fellow practitioners and provide assistance and opportunities for education and sharing of ideas.’ If you are new to bankruptcy practice, take advantage of that assistance.”

The article also addresses attorneys who left the field when the law changed in 2005 but are now coming back.

“The federal bankruptcy laws changed in 2005, thanks to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The changes placed additional burdens on debtors and their attorneys, and some attorneys decided it was time to get out. Now some of them are back. Judge Pepper cautions returning attorneys to be careful. ‘This area of practice has changed a great deal since the 2005 changes. People who practice bankruptcy regularly have begun to get used to those changes, but those who are returning to the practice might find it quite different. There are more ways for a debtor to slip up, and the consequences can be more drastic.’ “

In other words, it’s OK to have an attorney who laid out a while, or even a young attorney–but you as consumer need to make sure they are backed up by plenty of experience. That being said, in most cases having even an inexperienced-but-very-careful attorney would be better than representing one’s self. Such pro se actions are legal–but highly risky. As the bar’s article explains:

“Those who do go it alone make it much tougher on the courts. King says, ‘Pro se cases waste court and trustee time without a benefit to the debtor, who often cannot comprehend the requirements that must be met.’

“Judge Pepper agrees that pro se cases can be difficult. ‘We spend a lot more time working with people who don’t have attorneys, because they have the most questions and are the most likely to make mistakes in filing. I think from the judges’ perspective, we are concerned to see so many people coming through the system who don’t understand it and don’t have help understanding it. Sometimes there are things the law allows us to do to help them. Other times, our hands are tied. If they had a lawyer’s assistance, they would be more likely to avoid the kinds of errors that we, as judges, are powerless to correct.’ “

In other words, the court can help only so much and is never a substitute for competent counsel. Be an informed consumer; ask questions; make sure you are getting an attorney or firm with the resources, skills and experience you need for your particular case.