Before 2005, I had a consumer bankruptcy practice. I learned to dislike the consumer counseling agencies for promising much and delivering on nothing. Which is why I read The New York Times' Debt Relief Can Cause Headaches of Its Own with interest and quote it at length below.
While I no longer practice on the consumer side of bankruptcy law, I give you this advice: if you have the problems discussed below you need to talk to a bankruptcy attorney to get an accurate estimate of your problems and possible solutions and you need to do it now instead of letting the problem fester.
"What can borrowers do to extricate themselves?"
If belt-tightening suffices, one option is a debt management repayment plan in which interest rates, but not balances, are reduced.
Ronald J. Mann, a law professor at Columbia University and a credit expert, describes credit industry practices as intended to enslave borrowers in a “sweat box.” He recommends a Chapter 7 bankruptcy that wipes out most credit card debt.
Many consumers, however, are loath to file for bankruptcy protection, said Mark S. Zuckerberg, a bankruptcy lawyer in Indianapolis. And others may find that they cannot qualify for a Chapter 7.
Then there is debt settlement, when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. Debt settlement generally works best when consumers can offer a lump sum, the experts said. But consumers may face taxes on the amount the creditor has forgiven.
“Done correctly, it can absolutely help people,” said Cyndi Geerdes, an associate professor at the University of Illinois law school who also runs a consumer debt clinic.
Consumers can arrange debt settlement themselves, and many Web sites offer advice. Consumers can also hire a lawyer or use debt settlement companies, many of which advertise online and on television. The experts agree, however, that “buyer beware” is the best advice when considering debt settlement companies.***
Debt settlement companies are regulated by state attorneys general and the Federal Trade Commission, but they are rarely prosecuted. To improve regulation of this interstate business, the Uniform Law Commission, sponsored by state governments and based in Chicago, is promoting a model law that covers credit counseling and debt management companies. It was in force in four states last year, and an estimated five state legislatures will vote on it this year, said Michael Kerr, the commission’s legislative director.