Any experience getting a refund from debt settlement company

[QuinnReilly]

I'm on the verge of filing Chapter 13 thanks to signing up with a debt settlement company who has made my financial situation worse.

Backstory - 2 years ago, I had just shy of $100k in credit card debt plus a mortgage and car loan. I make 6 figures and was current on all bills but drowning and had very little savings. I was exploring some loan options through credit karma to try to consolidate some debt and get relief and a debt settlement company, Monarch Legal Group, reached out with a sales pitch that I'm ashamed to say I fell for. Flash forward to now - I have paid this company more than $28k, they have settled 4 of the 7 creditors I enrolled (currently in payment plans) but only 2 for significantly lower than what was owed (one of their promises). Now one of my creditors is suing me and the settlement offer would require me to pay an additional $900 per month which I can't do. With the pending judgement looming over my head, I don't see any option but to file.

Once I file, I will cancel the agreement with them and ask for a refund of what is in my escrow account (should be ~$3500 by my calculations). But I also want to pursue a refund of the exorbitant fees they front loaded from my payments as well. In doing some research, it appears to me that they are in violation of a law passed in Illinois around debt settlement companies. I also found a helpful blog that details steps to take to try to get fees refunded, such as reporting to the state's attorney office, etc.

Just wondering if anyone here has any experience with this?

[justbroke]

A debtor that is in a debt settlement plan at the time of filing bankruptcy has some special considerations. From what I understand, the Chapter 13 Trustee (or even Chapter 7 Trustee for that matter) will take the balance and potentially, even, claw back money that was paid within the last 90 days to any unsecured creditor. (There's a minimum amount before the Trustee would pursue any money paid out from the debt management company.)

The good thing is that you'd be free of the debt management plan, and you'd be in a Chapter 13. A Chapter 13 can get rid of much more debt than a debt management plan, and you don't (or won't) have the tax burden. Additionally, as you have personally witnessed, not all creditors play nicely with a debt management company and will just seek a judgment and then go after assets. The hidden thing is the dreaded 1099-C (forgiveness of debt) which creates a taxable event on forgiveness of (larger) debts. That tax could be devastating to some (especially for large amounts forgiven). The tax rate is the debtor's normal marginal tax rate for earned income. Ouch!

So, the refund wouldn't (likely) come to you. If the Trustee thinks it is enough money, then they may pursue it themselves. Technically the debtor could pursue it on behalf of the bankruptcy estate. Chapter 13s are strange, though, as the Trustees are not necessarily trying to liquidate the estate and get into preference actions, but if it is significant money, maybe they will.

(Even if you did sue them within the bankruptcy by filing a complaint, the question could be whether any settlement or judgment could be property of the Chapter 13 bankruptcy estate. Just some thoughts.)

I have no direct experience in this area. It's just what I understand having considered debt management over a bankruptcy... and that was many many years ago (2007/2008).

And don't feel bad... most debt management plans end in bankruptcy. In wonder if you can just cancel the plan and whether the money, on account, would come back to you via refund. That way you could pay for a bankruptcy attorney.

Maybe someone else has direct experience and how they dealt with the "money on hand" at the debt management company.

[QuinnReilly]

Thanks for your reply, justbroke. I will definitely discuss this with my attorney before taking any action. I will most likely be in a 100% repayment plan and he has already confirmed that if I am, any additional money, e.g., bonuses, raises, etc., would not go to the trustee. I'm hoping that is true for this money as well as it would help to establish some solid savings.

[justbroke]

That should be true since the Chapter 13 Trustees don't usually get involved in everything. I'm thinking that they just refund you and you just keep it. Chapter 13s work much differently than a Chapter 7 and since you are paying way more than the $3,500 in the Chapter 13, it would be a non-issue.