Law Offices of Nicholas Gebelt

I Have Bad Credit And A Lot Of Debt. Why Would Any Credit Or Debt Relief Services Want To Work With Me?


When answering this question, we must first distinguish lenders from credit or debt relief services.

  1. Predatory Lenders Predatory lenders want people with bad credit and a lot of debt because they can make tremendous profit by charging very high interest. After all, predatory lenders are savvy entities. They will only lend money at an interest rate that is large enough to account for the risk, plus a premium. The borrower becomes the lender’s cash cow.
  2. Credit Or Debt Relief Services Credit or debt relief services are a different concept altogether. (For simplicity we’ll refer to them as DRSs.) DRSs claim that they will negotiate with your creditors on your behalf. They may promise to reduce your interest rate, reduce your balance, or just make it easier for you to pay back your loan.
    1. Many DRSs Are Owned By Large Creditors While you might believe the DRS is looking out for your interest, many of these services are owned by the creditors themselves. If a “relief” service is actually working for your creditor, it can’t be trusted to have your best interest at heart. It will be motivated to find the most profitable outcome possible for the lender, and will only adjust your interest rate or balance insofar as it enables them to squeeze more money out of you.
    2. DRSs Typically Don’t Ask For Documentation
      1. Negotiating Directly With The Creditor Even if you find a credit or debt relief service that is not owned by one of your creditors, you will face another problem.

        To see this, suppose you went directly to your creditor, stated that you could no longer make the payments, and asked for a reduction of your balance or interest rate or monthly payment amount. How will the creditor react?

        If the balance on the debt is relatively small, the creditor might give you a minor reduction without further discussion. However, if the balance is relatively large — I am being purposely vague because what constitutes relatively small and relatively large depends on the creditor — the creditor will not take your word. Instead, it will ask for detailed documentary evidence in support of your assertion of impecuniousness. It will want evidence of your income, other debts, and assets you could liquidate to pay it. If it is not convinced that you don’t have the resources to pay, it will deny your request.

        For example, let’s say you owe your creditor $20,000, and have a house with $300,000 in equity. The creditor will tell you to take out a home equity line of credit to pay the debt in full. It is very unlikely that they would settle for less.

      2. Using A DRS Any legitimate DRS should ask you for documentation of your income and expenses, assets, and any other liabilities. If it doesn’t, you should be immediately suspicious. After all, why would the creditor take DRS’s word without documentary evidence, if it won’t take yours.

        Thus, putting a middleman between yourself and your creditor doesn’t absolve you of the need to prove to your creditor that you truly cannot make your payments.

        Approximately 10% of our clients have used DRSs. They call us after having been in the DRS program for about a year because they are facing lawsuits from the creditors who were supposedly being taken care of in the plan. This tells me is that the DRS plans are often ineffective.

        When such a client comes to me for help, we list how much they have paid to the DRS. Without exception the client has paid more to the DRS than the cost of a bankruptcy; and the client still owes the debt.

        Bankruptcy is a much more powerful tool than DRSs for several reasons.

        First, depending on the facts, bankruptcy can discharge debts without your paying creditors anything.

        Second, you file for bankruptcy under federal law, so you have the power of the United States Federal Government behind you to force your creditors to accept the terms of the bankruptcy. DRSs don’t have that kind of power, so bankruptcy really is better.

        Of course, there are cases where people have good experiences with DRSs. Therefore, I suppose my experience is a bit skewed since the people who come to see me have been unsuccessful in a DRS program. But I haven’t seen very many people who have had good results in these programs.

  3. The Free-Rider Problem If you have more than one creditor, another hurdle in negotiations — whether they are conducted directly or through DRS — is the “free rider problem.” The gist of the free-rider problem is that each creditor will insist on being paid in full, with the other creditors taking the bath.

    One of the many benefits of bankruptcy is you avoid the free-rider problem. Bankruptcy relief is global in nature, so you don’t have to deal with each creditor directly.

    Of course, if you have only one creditor, then there is no free-rider problem.

For more information on Bankruptcy In California, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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