I was meeting today with a new potential client who came in for a free consultation after seeing my bankruptcy website.  He’d receive a pitch from one of the 70-thousand “debt settlement” companies out there.  This company had clearly put some thought into their strategy.

They take $5,000 up front as their “fee.”  Then, you pay them a certain amount each month (which they promise that they’ll hold in escrow).  Then they’ll send small payments on your behalf to all of the credit card companies you owe debts to.

All of that sounds pretty standard for their industry.  Now, here’s their brilliant strategy.

Each check they send out will have some fine print on it. It will say things like “in full satisfaction” or “by cashing this check you agree to take 25% of the total owed” or somesuch.

PURE GENIUS! Well, except for one tiny detail… it does not work.

See, that’s an old trick. The law used to be that “endorsement language” like that was binding. I think it was about 1960 when that was the law.  Now, the Uniform Commercial Code has a section that says exactly the opposite– that cute language on a check is NOT binding on the person who cashes the check. Here in Texas, it’s Tex. Bus. Com. Code § 3.311.

A debtor cannot use a paid-in-full check to discharge a claim if: 1) the payee is an organization; 2) if the organization has communicated to the other party that an offer of full payment is to be sent to a particular person, office, or place; and 3) the check was not received by the designated person, office, or place.The “paid-in-full” check is treated as a partial payment and not an offer to settle unless it meets the above requirements.

So in the end, you pay $5,000 plus a part of your debts, and still owe the rest of  the debt because your “debt advisor” used a 50-year old law. That’s not any kind of bargain, since a Chapter 7 bankruptcy only costs $1999 and will get rid of all of your debt.

They like to say “avoid bankruptcy.”  But really, there is no magic bullet. The court system has been around for hundreds of years, and in that time the judges have seen every trick in the book.

Whenever someone tells me they’ve thought of a “loophole” or “developed a system” for avoiding bankruptcy, it tells me one thing for sure– they haven’t been around long enough!

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