Q: I have $45000 in debt, a "debt resolution" lawyer is telling me to enroll on their program. Their fee is $500 per month

A: Once you accumulate a certain amount of money, they will negotiate with your creditors to accept that amount in full resolution of the debt. However, in the meantime, you will be in arrears (not paying), which will affect your credit. Obviously, the debt resolution company keeps a portion of that money. The one issue you should be aware of is that whatever amount is forgiven (in that negotiated settlement), is considered income by IRS and you will have to pay taxes on it. Through bankruptcy no taxes. You should speak to a bankruptcy attorney as well, it may provide a better option for you.

A: Bankruptcy would almost certainly cost you a lot less, and be a lot quicker. Consult a bankruptcy lawyer about that option before entering into this arrangement.

A: You are right to be skeptical. There is no certainty that your creditors will agree to settle your debts. A 'good settlement' now is typically 50 cents on the dollar, with many creditors requiring an even higher amount. You are only paying enough money to offer your creditors 40 cents on the dollar and that is not even factoring in the fees the attorney will take before making offers to your creditors. You will potentially owe income taxes on the debt that is written off by the creditor. You may settle with one of your creditors while your other creditors are starting lawsuits against you. If this happens, you will probably need to file a bankruptcy. You should speak with a bankruptcy attorney before you decide to work with the debt settlement company.

A: Several of my bankruptcy clients have used such "debt resolution" services before engaging me, and none have good things to say about them or their effectiveness.

A bankruptcy case, filed in a real court, is the only path to a legally enforceable discharge of debt. Anything short of that depends entirely upon what creditors may decide to do with your debt. Many will opt to take a judgment, to create a lien to secure their claims. Even in a bankruptcy case, liens are protected against discharge to the extent of any equity value in your assets.

A bankruptcy lawyer is almost certainly going to charge you far less than the "fee" to your debt resolution" service.

A: Debt settlement programs can work, but the problems happen when they do not (and unfortunately is often that the programs do not work). The payments you made are based on what the debt settlement company expects the creditor to accept. If the creditor wants more than they or refuses to settle, then you have the issue that there is then not enough money to go around and you may have to pay in more. The reason this is a problem is that debt settlement is controlled by what the creditor agrees to. If no agreement is made, then the creditor is likely will sue you in court.

As for challenging debts and what was done wrong on the account, it is hard to do. Debt collectors are smart and follow the rules. Unless you have older debts that can be barred by the statute of limitations, it is often hard to get a creditor to back off or find a mistake that is worth them not collecting at all.

Many people who attempt debt settlement end up having to file bankruptcy because the program does not work. I often encourage people to at least consult a bankruptcy lawyer before signing up for a debt settlement program to get an understanding of all your options. Many of our clients end up paying less to creditors (often nothing in a Chapter 7) and the attorney fees in a bankruptcy are often substantially less. Credit rebuilding also starts immediately after bankruptcy is over vs. in debt settlement it doesn't happen until all your accounts have been handled.