Ask The Money Coach

Posts Tagged ‘debt management plan’

Q: “Is debt settlement OK or is there a better plan?”

A: I really don’t think that debt settlement is OK and yes, I do think there is a better plan. It is called the “Debt management plan.”

The problems with debt settlement, which tends to last about three years to four years or so in terms of paying off creditors that you owe via the debt settlement plan.

The problem with those processes when you go through debt settlement is that your credit rating gets wrecked in the process, because debt settlement companies advise you to stop paying your bills until you have billed up enough money to be able to approach your creditors and attempt to negotiate a settlement, perhaps for $0.20 on the $1, $0.30 on the $1, or maybe $0.50 on the $1 that was owed.

During those six months or so that you are not paying however, you are constantly being reported to the credit bureaus as delinquent. So that means your credit report and your FICO credit score, take a big hit.

There is also no guarantee that debt settlements is going to work out, and some creditors may balk at your terms and choose not to play ball with you, so to speak, and they may take a more aggressive action to collect against you.

Finally, debt settlement has serious tax implications for consumers. Any amount that is essentially forgiven or written off by the creditor is deemed by the IRS to be income to you, taxable income to you, so you have to pay income taxes on that.

So for these reasons, I really do not recommend debt settlement. And yes, I do think there is a better plan, it is debt management.

With a debt management plan, it has no impact at all on your credit rating or on your FICO credit score according to Fair Isaac, the company that created FICO credit scores. The fees tend to be lower for debt management plans as opposed to debt settlement plans.

Also a lot of the really good reputable non-profit agencies that do debt management plans, also make a point to provide you with a serious amount of budgeting, credit counseling and personal finance education to help you to know what you did wrong and to avoid getting back into debt in the future.
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In my book, Zero Debt, I explain how I got into debt (mainly via overspending), and also what it took to get me out of debt. To pay off my credit card bills, I used the exact same strategies I outlined in my book – getting a budget together, cutting back on frivolous spending (like vacations & dinners out), refinancing my auto loan, negotiating with my creditors for lower interest rates, doubling and tripling up on the minimum payments I was making, and using “windfalls” or “extra” money, like income tax checks and year-end bonuses from my job to pay off debt, etc.

Making Tough Choices

I also made some tough choices, like taking my two older kids out of private school and putting them in a less expensive private school. (They’re actually now in public school, and doing just great). After nearly 3 years of all this, I’d paid off $70,000 in credit card debt. Then in early 2004, my ex-husband and I sold some land we owned and used $30,000 to pay off the last $30,000 of credit card debt we owed.

In your question, you mentioned joining a debt management plan and taking on a second job. I know those were tough steps for you to take. But congratulations for doing so, because they will definitely help you become debt free faster. Lastly, I don’t know if you have a copy of Zero Debt. (The original version came out in late 2004; the updated, second edition of the book came out in 2009). In any event, in Day 25/Chapter 25 of Zero Debt, I also explained three different debt pay-off strategies that you can use to knock out credit card debt. (In my case, I used Strategy #2). Good luck in eliminating those credit card bills!

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