With regulation of the debt settlement industry around the corner and the debt settlement groups saying that when debt settlement companies are prevented from collecting fees before providing service that 85% of them will go out of business, it’s time we talked about what to do when your debt settlement company fails.
The vast majority of debt settlement companies that have sold services to consumers have done so on an advanced fee model. They have collected the bulk of the total fees to be paid for providing settlement services before services were performed. In essence much of the money that was taken as income today and spent, was for work that would not have been delivered for years into the future. These debt settlement companies wound up operating just like a massive Ponzi scheme instead of placing the money received in protected accounts to actually be taken as income when the services were performed.
FACT: If your debt settlement company goes out of business is there is probably little money left in the company to offer refunds.
Many debt settlement companies have grown bigger and bigger with the massive advanced income they took in. They obligated themselves to larger office spaces, and more overhead even though there was no expectation the ride would continue.
The industry was marketing a product they had no control over and one day that business model could be dropped to its knees if creditors or regulators decided to make changes. If you are reading this, that day has probably come.
FACT: When the debt settlement companies fail there will be large amounts of secured creditors that will go after them for money due for overhead expenses and the debt settlement corporations will go bankrupt so the owners can escape legal awards against the companies and end monetary claims by creditors.
While you may have some money left in a third-party escrow account with a company like Global Client Solutions or NoteWorld, any money that was paid in fees to the debt settlement company will only be recoverable by participating in the bankruptcy of the debt settlement company as an unsecured creditor. You will be asked to fill out a claim form for submission to the bankruptcy court and you will probably receive a notice by email but certainly in the mail at your last known address. Make sure your debt settlement has your current email and mailing address on file in case they fail suddenly.
FACT: In the bankruptcy of the debt settlement company there will be little money to pay unsecured creditors. Unfortunately that means you.
Consumers that have had their debt settlement company fail are going to be dumped back at square one. There will be no foreseeable company or enterprise to take over abandoned clients for free. People will find themselves effectively back to being in debt, without the support they paid for, and without the thousands of dollars they paid in fees.
FACT: When the debt settlement company fails you will be left back in debt and without another company to take over your account. The money you paid in fees will be gone or what little may be recovered will take months or years to do so.
The moment you hear that your debt settlement company has failed you need to deal with your debt. For most people that will be to seek protection under bankruptcy. You can click here to find a local bankruptcy attorney and go talk to them.
If you were enrolled in a debt settlement program because you could not pay your creditors what they were due then bankruptcy is going to be the most logical solution.
Bankruptcy will stop collection activities, block lawsuits against you from creditors, stop wage garnishments and most people will qualify to have their debt eliminated under bankruptcy in just a few months.
FACT: Most people will file bankruptcy when their debt settlement company fails.
Some debt settlement companies may actually be closed down by the state they reside in. In that case a court appointed receiver will contact you in an attempt to help you get a partial refund from money that was frozen when the company was seized. When the company is taken over by the receiver, debt settlement services will most likely end immediately and a slow moving claims process will begin.
FACT: If your debt settlement company goes out of business and falls under a court appointed receiver, services will stop and it will take a long time to get any refund.
You may feel that you want to file a lawsuit against the debt settlement company when they go out of business. That is your right.
You can either contact a licensed attorney in your state for help or you may just want to file a lawsuit through your local small claims court. Small claims court will be less expensive and probably faster for you. You may want to pursue a claim against the marketing company that sold you the debt settlement program, the company owners and the company itself. You can locate the people responsible for the company by searching state corporate records online.
If you do decide to sue in small claims court you may want to find and use a self-help book like this one.
FACT: If you want to sue the debt settlement company then small claims court will probably be a faster and cheaper way to do it.
It is well within your right to file a complaint about your debt settlement company when they go out of business. When that happens you will be angry, feel victimized, and oh yea, still pretty angry.
You might feel you want to complain to authorities about what happened to you. You can file a complaint with the BBB, your State Attorney General and any local consumer protection office. However, if the company went bankrupt there will be little the complaint will actually achieve.
FACT: If the debt settlement company goes out of business and bankrupt there is little that will be achieved with a consumer complaint other than documenting the treatment you received.
The end result is that there are no good options for you if your debt settlement company goes out of business.
You need to understand the thousands of dollars you paid in fees will for all intents and purposes be lost for good. If any money may be recoverable under a company bankruptcy or court appointed receiver, that will take a long time. In the meantime you will need to deal with your debt and you will either need to:
- find a new debt settlement company and pay fees all over again but this time only pay fees after a debt has actually been settled;
- come to a payment agreement with your creditors directly; or
- seek protection by filing bankruptcy yourself.