The ads are all over: “Live your life debt-free!” “You’re pre-qualified!” “Debt-free guaranteed!”
Maybe you saw a billboard or got a letter in the mail from a company promising that they can reduce or eliminate what you owe, no matter how much you owe. Sound too good to be true? Well, as your mama used to say, if it sounds too good to be true, it probably is.
Debt reduction companies promise a lot, and sometimes, they deliver. But sometimes, consumers end up getting scammed and end up in worse shape financially than they started. There’s lots of reasons to be wary of debt reduction plans, says San Antonio lawyer and Texas Legal network attorney Stephen Gordon.
“People should be wary of these companies because some of them are not legitimate, and even when they are, people often end up not being able to afford the payments and lose even more money in the long run,” says Gordon.
Learn what a debt reduction plan is, why you should think twice before starting one and some possible alternatives, which are covered with a Texas Legal membership.
What is a Debt Reduction Plan, and Why Should I Be Suspicious?
“What debt reduction companies attempt to do is to find all your debt – every credit card or loan or company you owe money to – and get them to negotiate to reduce the debt,” says Gordon. “Then they put all the debt you owe into one lump sum monthly payment you make to them.”
Part of the problem with debt reduction plans is that many of them do a poor job of explaining exactly how they works. Gordon says he had clients that made large monthly payments for over a year, only to find that their debt reduction company hadn’t made a single payment to their creditors. Others have paid the company and then ended up getting sued later by their original creditor, because that creditor still hasn’t been paid yet. A few years ago, a debt reduction company in Texas even went bankrupt themselves!
“People start the process expecting that they’ll get some sort of legal protection, and they often don’t,” says Gordon.
Every company charges a fee for negotiating and paying your debt, and what those fees are isn’t always clear.
“A lot of companies don’t really disclose their fees. Clients don’t seem to know what percentage of their monthly payment is actually going toward their debt,” says Gordon.
Can You Afford a Debt Reduction Plan?
But the biggest problem with debt reduction plans is that the monthly payments are often very high.
“People come to me after a year of payment, saying, ‘We just can’t afford these payments. It’s too high, we just can’t do it,'” says Gordon. “If they had called me a year ago, all the money they just lost in a debt reduction plan could have gone toward their debts or bankruptcy, and they could have been done paying 100 percent.”
That’s why Gordon urges people to talk to an attorney first before entering any sort of debt reduction plan. Depending on your financial situation, there are better alternatives.
“Even if you go down the debt-reduction road, it’s a good idea to consult with an attorney,” says Gordon. “Debt reduction may be good for you or bad. Either way, it would at least explain some of the things you might not know about when you sign up.”
What Are Alternatives to a Debt Reduction Plan?
Gordon recommends sitting down with an attorney to discuss your debt situation. Then you can get personalized recommendations on a course of action. If you only have two to three large debts, an attorney may be able to negotiate those debts for you and help lower what you owe.
“Beyond three or four debts, the cost to have us negotiate them for you becomes comparable to a bankruptcy case. That is why we usually recommend that a person consider declaring bankruptcy if they qualify and have a lot of consumer debts,” says Gordon.
Although many folks are scared by the idea of declaring bankruptcy, Gordon says bankruptcy gives many consumers a fresh start they really need.
“Many people think bankruptcy will ruin their finances for life,” says Gordon. “That’s not true.”
Gordon says if you qualify for bankruptcy, it’s usually a better way forward. That’s especially true if you can declare Chapter 7 bankruptcy, which allows you to get rid of most all your debts.
“Most people think they have to give up all their property, but that rarely happens. The average person will walk away from a bankruptcy proceeding keeping 100 percent of the property they owned beforehand. People also think bankruptcy will ruin their credit for life. In reality, in two or three years, they can build their credit back up to be looking pretty good,” says Gordon.
Gordon says it’s worth at least talking to an attorney to get a realistic assessment of your financial situation. Then you can figure out what can be done to help you move forward financially.
How to Talk With a Lawyer About Your Debts
Before you sit down with an attorney, Gordon recommends gathering some documents. These will help your attorney get an overview of your financial situation:
- A current copy of credit report – you can get one for free at annualcreditreport.com
- gather up 2 months worth of pay statements showing how much you make per month
- one year’s tax return
- 2 months of bank statements
An attorney can tell you whether or not you qualify for bankruptcy. For example, if you’ve already declared bankruptcy in the past few years, you won’t qualify. Or if your debt is primarily for student loans or child support, you may not qualify as well.
Gordon recommends reading online reviews of attorneys before going to see one on websites like Google, Yelp or Avvo. Beware of anyone who seems to be overpromising, he says. They’re likely not giving you all the information.
What Does My Texas Legal Plan Cover When it Comes to Debt Reduction
Your Texas Legal plan can help a lot when it comes to getting help with your debts. First, as a Texas Legal Member, you can sit down with an attorney to discuss your debts for free. Debt negotiation is a covered service under our Preferred Plan. In addition, if you’ve been a member for over 3 months on the Preferred plan, your policy covers both Chapter 7 and Chapter 13 bankruptcy . Members who have the Select Plan get a 25 percent discount on attorneys fees for debt negotiation and bankruptcy.
If you’re worried about debt and you’re a Texas Legal member, you can easily get help from a qualified attorney. Start your search today with our online attorney finder. Search for an attorney near you in the area of financial law.
Not a Texas Legal member? Consider signing up today. It’s available to every Texan. A low monthly premium gets you a qualified attorney by your side, whenever you need it. Read our reviews on Google and Facebook.