The Debt Relief Law

What you don’t know about the business of getting out of debt will cost you. The question you must ask yourself is how much are you willing to pay for freedom. Quite simply, the options are (1) pay it all off in the usual way; (2) negotiate less than what you owe through negotiation; (3) consolidation; (4) debt relief payment plans; and finally, (5) bankruptcy. Certainly, if you’re struggling to pay what you owe, chances are you’re in too much debt. Let’s look at the costs and benefits of each of these options. We’ll skip the “pay the usual way” because if you did, you wouldn’t be reading this article.


When we settle our debt, we are asking the creditor to accept less than what is owed. Let’s say you owe $5,000.00 and you convince the company to take $2,500.00 instead. You will pay them the $2,500.00 and then receive a tax bill for the other half that the creditor wrote off on a 1099 tax form.


When you take all your debts and consolidate them, you are usually taking out a new loan. When you’re turned down for a consolidation loan, you’ll need to look at other options. A new loan will pay off all other debts and you make a payment for the agreed terms, plus interest. This is not a plan to reduce what you owe. The average annual percentage rate (APR) on this type of loan is around 18.56%. To put that in perspective, the average range of interest rates charged on consolidation loans is generally between 8.31% and 28.81%.

For a total debt of $30k with an average interest rate of 48.56%, the monthly payments would be approx. $771.00 for 60 months and the total payment would be $46,258.00, this being the most expensive way out.


Debt relief companies are everywhere these days, advertising for you to “speed up your debt free date” and get a payment plan you can afford. Some of these companies have been sued for violating telemarketing rules, charging up-front fees to help, and failing to inform you of your rights on deposited monthly payments.

What you are paying for here is for the company to take your monthly payment and negotiate a settlement of your debts for less than what you owe. This is a trading strategy with a payment plan. There will be a 1099 tax bill after these accounts are settled, so be prepared for that too. Here’s where you can pause and read the fine print I found in an ad:

“Clients who make all of their monthly program deposits pay approximately 70-75% of their original enrolled debts over 24-60 months. Not all clients are able to complete their program for various reasons, including their ability to save sufficient funds. Our Estimates are based on past results, which will vary depending on your specific enrolled creditors and the terms of your individual program. We do not guarantee that your debts will be resolved by a specific amount or percentage or within a specific time period. We do not assume your debts, make monthly payments to creditors or provide credit or tax repair services, bankruptcy, accounting or legal advice The company does not offer debt settlement services in all states and rates may vary from state to state In some states, we can refer you to a trusted business partner who can provide you with alternative debt relief services. Please join with a tax professional to discuss the possible tax consequences of a less than full ion debt resolution. Please read and understand all program materials prior to enrollment. Using debt settlement services will likely negatively affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors, and may increase the outstanding balances on your enrolled accounts due to the accumulation of fees and interest. . However, the negotiated settlements we obtain on your behalf resolve the entire account, including all interest and fee increases.”

This means your savings is a nominal 25% to 30% discount off your debts after paying the company’s fees and costs to maintain that account for you. In the meantime, they cannot prevent interest from accruing, nor do they prevent creditors from stepping up their efforts or even filing a lawsuit. This could increase costs over time and still cause you to end up bankrupt. So maybe you can save time and money by considering the latter option.


There are two chapters of the Bankruptcy Code that anyone may want to file. Chapter 7 bankruptcy is a liquidation case where you don’t have money to make a payment plan. The other is a Chapter 13 bankruptcy case, which is a 5-year payment plan case. Let’s compare a bankruptcy payment plan with the plans just mentioned.

Let’s level the playing field so you have enough information to make an informed decision for yourself.

In reality, it is extremely difficult to pin down the total cost of these debt relief plans because the interest continues to grow while you create an account for the company to use to negotiate a discount. What’s worse, the discount they get is likely to be higher than what you’ll see because there’s a trade-off in their fees for the service.

In case of bankruptcy, the fees and costs are established and included in the monthly payment. For that same $30k debt, and adding the 11% trustee fee and the $5k average attorney fee, and even discounting the debt by 30%, you will get a monthly payment of $470.00 per month for 60 months for a total cost of only $28,200.00 for a Chapter 13 case.

Bankruptcy offers protection against creditors by invoking the Automatic Stay, which is a court order that prevents creditors from filing lawsuits against you or attempting to collect while you make your payments under Chapter 13 of the Bankruptcy Code. Other benefits include no interest accruing on unsecured debt (ie credit cards), and no income tax consequences for debts discharged in bankruptcy. Oh, and did you know that credit scores actually improve when you’re in a payment plan case? They do. How much are you willing to pay to speed up your debt-free date, and do you really understand the price you’ll pay?