Debt Relief Programs: “Dirty Little Secrets”

Over the years, dozens, if not hundreds, of people have come to me to file a bankruptcy AFTER participating in a debt relief program.  Almost all of them have the same story:  They joined a debt relief agency or program; paid out thousands of dollars to the agency to avoid a bankruptcy; but now are being forced to file a bankruptcy.    Why?  How can this be?  Because of their “dirty little secrets”.

I call them “dirty little secrets” because the groups don’t lie, per se, they just don’t fully explain everything.  The secrets are the things they don’t say.  And, they often say things that are contradicted by their writing.  And, they carefully choose their words.  And, while they are not scams in the legal sense, most are just not effective.

The most common program offered by debt relief agencies is one whereby you make a payment to the agency each month.  They in turn, place your money into a piggy bank, so to speak.  Once the piggy bank has grown to a certain amount, the debt relief agency will call your creditors and attempt to reach a settlement.

This does not sound bad.  However, what they don’t tell you, can be devastating.

So, here is a list of debt relief groups most common “dirty little secrets”, in no particular order.

  1. “Non-Profit Group”- Most debt relief agencies or groups will proudly tout their non-profit status. This is often done specifically to sound pious or charitable. In reality, this means nothing to the average Joe.  All this means is, that after the group pays all of its costs, including very generous salaries, there is no money left to distribute to share-holders.  It does not mean they are working for free.


  1. “We can work with your creditors” – This is one of their carefully selected word choices. Of course they “can” work with creditors!  Anyone can.  You can do this yourself.  The question is, will the creditor work with you?  Will the creditor agree to lower payment, lower interest, etc.?    Maybe not.  The groups are not promising results.  They are just stating the obvious.


  1. Tax Implications – Often, this is something hidden in the fine print of their contract. Here, in the US, forgiven debt is income.  Forgiven debt is reported to the IRS and you must pay taxes on it.  So, for example, did the debt relief group just settle your $10,000 credit card for $2,000?  Then, you now have an additional $8,000 income that will be taxed at the end of the year.  However, BANKRUPTED debt is NOT income.  Filing bankruptcy over going with a debt relief agency can save you thousands of dollars in taxes.
  1. Lawsuits – Many debt relief agencies tell their clients to stop paying all debts and instead, pay them.  In the program I mentioned above, while the debt relief agency is collecting your money and growing the piggy bank, your creditors are NOT being paid.   The payments you make are sitting in the piggy bank.  After a few months of not getting paid, the lenders will often file lawsuits and start garnishing your paycheck.   There is NOTHTING stopping the creditors from doing so.  The debt relief agency has NO POWER to prevent this and NO POWER to stop the lawsuit.   How do you stop the lawsuit? Either pay the debt off or file bankruptcy.
  1. Fees – The debt relief agencies are not working for free, despite their possible “NON-PROFIT” status.  Many charge fees that are thousands of dollars higher than the cost of doing a bankruptcy.  If the person ends up in a bankruptcy (as most do) or the program is not successful, those fees have all been paid for nothing.   It is hard earned money that has been flushed down the proverbial toilet.
  1. Fees for what? – Sticking with the topic of fees, what are the debt relief agencies doing to earn those fees.  As I mentioned earlier, most groups are simply saving the debtor’s money in the piggy bank and then calling the creditors.   The calls to the creditors are just to ask for a reduced price.  They say “Hey, we know that John Smith owes you $10,000, but will you take $2,000 in cash to settle?”  The creditor has every right to say no or to say they want $9,000, for example.  The debt relief group is just asking.  Again, they have NO POWER to force a settlement.  They are simply begging.   Well, you can do that for yourself for FREE.  You don’t need the debt relief group to call for you.  So, again, why pay thousands in fees?
  1. Sounds like a Chapter 13 bankruptcy – Debt relief groups offer services that are almost identical to a Chapter 13 bankruptcy, with one major exception.  A Chapter 13 bankruptcy is a repayment bankruptcy where you repay some or all of your bills through the bankruptcy.   Instead of paying each creditor separately, a person makes a payment to the bankruptcy court which then pays off your bills.  This sounds very similar to what the debt relief agencies are offering without having a bankruptcy on your credit.  So, what is the difference between the two?   The difference is this: when you a file a bankruptcy, your creditors are usually FORCED to accept less.   There is no asking.  No begging.  They are forced by Uncle Sam to take less or nothing.   Also, I mentioned above, bankrupted debt is not forgiven debt, and thus, there are no taxes owed.
  1. “Who owns this agency?” – One final dirty secret is that often, the debt relief agencies are owned by large banks. So, if you contact the group secretly owned by Large Bank of the USA, for example, it will first and only deal with the debts owed to Large Bank of the USA.  Any other debts you have just get ignored.  Or the person is told “sorry, they wouldn’t work with us.”


Basically, these companies/programs do not work.  Don’t waste your hard earned money.  Contact a bankruptcy attorney BEFORE you start a debt relief program.