Economic downturns create new opportunities for the motivated and creative.  Although that’s a very good thing, it does come with a slimy underbelly about which you should be aware.

Our apparent recession is bringing out the best in many people, but it’s also providing hucksters and other nefarious souls with a platform from which to conduct some pretty unscrupulous business.  Consumerist recently outlined five scams that seem to have traction during recessionary times.  I found one of them particularly interesting–the “hidden bankruptcy”.

An advertisement trumpets, “consolidate your bills into one monthly payment without borrowing” or something similar.  That’s the come on.  What isn’t mentioned in any of the promotional materials is the actual methodology they advocate to accomplish that goal.  They’re doing their best to dance around using the “B” word–”bankruptcy“.

In some cases, businesses (and I use that term loosely) may offer debt consolidation services that will involve the customer filing for bankruptcy.  These “bankruptcy mills”, as U.S. Representative James Moran (D-VA) terms them, do their best to drag customers into the filing process, touting its advantages without necessarily explaining alternatives and the negative consequences of a bankruptcy.  Put simply, it’s sleazy.

In other cases, you might encounter someone trying to sell you a guide to debt consolidation.  You won’t realize it until you receive the “guide” (thanks to some careful marketing) but it will be little more than some cobbled together information about how to file for a bankruptcy.

These ugly tricks are common enough that the Federal Trade Commission has issued a special consumer alert in which it “cautions consumers to read between the lines when faced with ads in newspapers, magazines, or even telephone directories” that offer debt reduction services or techniques.

Bankruptcies aren’t always a bad idea.  There are cases in which filing for a Chapter 7 or 13 bankruptcy can make a great deal of sense.  However, most people can find ways out of their debt problems that won’t involve filing for a bankruptcy.  These alternatives will also allow them to avoid the negative repercussions that inevitably follow a filing.  A bankruptcy might allow you to escape the burden of some debts, but it will also saddle your credit reports with a scarlet “B”, making it exceedingly difficult to obtain credit for legitimate uses.  A bankruptcy may even prevent you from obtaining some kinds of jobs.

In other words, bankruptcy is a serious decision.  It shouldn’t be done on a whim and it certainly shouldn’t be encouraged absent the consideration of other options.  Companies who advocate bankruptcy, particularly those who do so while trying to hide their real intentions, should be viewed suspiciously, to say the least.

The FTC and other sources recommend looking for ways to resolve debt problems that don’t involve the “nuclear solution” of a bankruptcy.  These include trying to work out arrangements with creditors, changing personal money management approaches, considering legitimate debt consolidation alternatives and working with reputable credit counseling services.

Those who find the “bankruptcy mill” advertising campaigns too disingenuous may also want to consider discussing the matter with their legislators.  Moran, for instance, supported an amendment to the 1999 bankruptcy bill that would’ve required:

“debt relief organizations to disclose the nature of the services they offer, explain to consumers the alternatives to filing bankruptcy, disclose the rights and obligations of a debtor who files for bankruptcy and the consequences of a bankruptcy filing. The purpose of the amendment is to educate the consumer about bankruptcy and bankruptcy mills before it is too late; in other words, before the debtor has made an uninformed decision.”

Although my personal predilection is to favor free speech whenever possible, including commercial speech, some may want to reconsider that idea if companies are acting in an intentionally misleading fashion and are clearly victimizing consumers in the process.