Many companies, some reputable, but most not, will offer to settle your debts with your creditors at a discount from their face value. They ordinarily take 15% or more of the savings as well as a high administrative fee up front. They tell you to stop paying your creditors and to refer them to the debt consolidation company. You pay the debt consolidation company a monthly fee that is usually less than your credit card minimums which gets put into a separate account to pay the company and perhaps your creditors. The company tries to get the creditors to accept a discounted amount or an amount with less interest.

Many of our clients first went to debt consolidation companies before coming to see us. They paid, for example, $800 per month. After many months, while their credit was ruined without hope of being rehabilitated, perhaps one or two creditors settled while most did not. A few creditors even sued them in court.

The fact is that unlike bankruptcy, settlement of debt is voluntary and it is really hard to do. The credit card companies do not roll over and play dead when you sign up with a debt consolidation company. The agents for your creditors have very little authority to settle the debts, especially in the first months that the account has gone delinquent. Only after the debt is “charged off” in about four to six months does the account get sent to another department in the bank with authority to settle, and their marching orders have little or nothing to do with whether you’ve assigned a consolidation company as your agent in negotiating the debt. They will do whatever they would normally do, which may include suing you.

There is no law like the Federal Fair Debt Collection Practices Act (FFDCPA) that prevents creditors from calling and harassing you while the consolidation is attempted like there is for attorney representation prior to filing bankruptcy. So expect to be harassed despite trying to handle the obligations through a debt consolidation company.

Keep in mind that if you’re insolvent like a lot of my clients, you can’t afford anything to go to pay credit card debt. The truth is most of my clients have a hard enough time just paying their expenses. The reason they turned to credit cards in the first place was to leverage their income up because it wasn’t enough. So those that attempt debt consolidation are just pledging money they don’t have.

When our clients attempted to get the thousands of dollars they spent on attempting debt consolidation they had mixed results. Some managed to get some money back but others were informed that all the money they put in was taken up by fees, even if no creditors were paid. The companies were out of state, and they are loosely regulated at the state level. We have had several clients lose $5,000 to $10,000 before they realized they had to file bankruptcy to really solve the problem.

If you’re not insolvent, and you don’t care about your credit score, it is possible a debt consolidation company can save you some money.

But if you’re insolvent, then a debt consolidation company is an inefficient, expensive and harmful distraction from a real remedy that works -- bankruptcy.