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Posts Tagged ‘Debt Settlement’

With the average U.S. household owing more than $10,000 in credit card debt, it’s no surprise that millions of consumers are turning to debt management companies or debt settlement firms to become debt free.

However, there are enormous differences between these two types of organizations. A good debt management company, such as the National Foundation for Debt Management, will offer free or low cost services, can help you preserve your credit rating, and will teach you to organize your finances and budget properly. It will also successfully negotiate with your creditors to give you financial relief.

By contrast, even with the “best” debt management companies, consumers often pay high fees, wind up with serious blemishes on their credit files, and receive little to no financial education.

Additionally, while many debt management firms tout “guarantees” about their work, in reality they have no way to ensure that their questionable techniques and unorthodox negotiating methods will ultimately be effective.

It’s little wonder then that the entire debt settlement industry is about to become heavily regulated, thanks to the financial reform bill President Obama recently signed.

Read on to discover the downside to using the services of debt settlement companies – and why using a debt management company is far more advantageous.

The Hit to Your Credit Scores

The primary reason that I don’t recommend using debt settlement companies is that they typically advise you to stop paying your bills for a few months – sometimes as long as six months or more. At the end of that period, the debt settlement company goes to your creditors and tries to negotiate settlements on your behalf.

The logic used by debt settlement firms is simple: They figure that after a few months of not getting paid, your creditors will be so eager to receive some money (instead of no money) that these creditors will gladly settle your debts for pennies on the dollar.

If only it were that easy.

The problem with this is strategy is two-fold. First, you wind up with serious black marks on your credit reports and you decimate your FICO credit scores. After all, just one late payment can drop your FICO credit score by 50 points or more. Imagine the damage done by being three to six months late on multiple accounts.

Another reason your credit takes a hit with debt settlement is that, when it is “successful,” your creditors agree to accept less than the full amounts owed (even though they will consider the balance as paid). The creditors often then turn around and report to the credit bureaus that your account was “Settled” or “Paid by Settlement” – which still tarnishes your credit records with Equifax, Experian and TransUnion.

Does Debt Settlement Work – Or Does is Backfire?

Additionally, there is no assurance that the methods used by debt settlement firms will work. Instead of caving in to a debt settlement company’s demands to let you pay, say, $30 for every $100 you actually owed, creditors may just decide to sue you, get a judgment against you, or garnish your wages. Needless to say, if any of these events happened, your financial situation and/or your credit would be worsened – not improved.

The Better Method – Education and Reasonable Negotiations

Rather than use a debt settlement company, a better strategy is to first try to negotiate directly with your creditors. If your efforts fail, and you can’t keep up with your bills, then it’s time to enlist the help of a credit counseling agency/debt management firm.

A good non-profit, HUD-certified credit counseling agency is the National Foundation for Debt Management. I’m a spokesperson for this organization, and I know that they do good work and are trustworthy.

Debt management programs are typically scheduled to take three to five years to complete; most debt settlement programs usually take two to four years. Fortunately, enrolling in a debt management program, also known as a DMP, shouldn’t backfire on you – as long as you continue to pay your bills on time.

When you enroll in a debt management program, your credit files do include a notation that you are participating in a DMP. However, taking part in a debt management program does not adversely impact your credit rating, nor is it a factor in how your FICO score is calculated, according to executives from Fair Isaac Corp., the creator of the FICO score.

Your credit rating also doesn’t suffer because you are paying back everything you owed in a typical debt management program. The cost savings come primarily from having late fees eliminated, and interest rates lowered – two key factors in helping you become debt free fast.

Don’t Forget About Debt Settlement Fees …. And That Big Tax Bill

Obviously, costs vary for debt elimination programs. But $25 a month is a common monthly fee for many debt management programs. Most debt settlement companies charge you in one of two ways:
•    a flat fee, which often runs $1,000 or more, and is based on how much money the debt settlement “saves” you by negotiating with your creditors

•    a percentage fee, with fees of 15 to 20% of your total debt being typical
o    So for those with $10,000 in debt, fees would run about $1,500 to $2000 for a 3-year debt settlement program, compared with about $900 in fees for a typical 3-year debt management plan

Thanks to financial reform, however, starting October 27, 2010, debt settlement companies will no longer be able to charge upfront fees.

Why Pay Thousands When You Are Already Thousands of Dollars in Debt?

Besides the fees cited above, it’s not uncommon for debt settlement firms to impose added monthly charges on their clients. These fees can be as low as $20 a month or as high $90 or $100 a month, depending on the company in question. Over time, therefore, consumers shell out several thousand dollars – on top of the initial fees charged – when they opt to go with a debt settlement firm.

Finally, when people enter debt settlement programs, they are usually required to make regular payments to the debt settlement firm before the company will negotiate with your creditors. In other words, they hold onto your money until they deem it’s the right time to approach your creditors.

By contrast, with a debt management company, they’ve already pre-negotiated in advance with your creditors.

So a debt management company should be able to tell you right away, for example, that your Capital One Visa card with an 18.9% interest rate will now be lowered to 7%; or that your department store charge card from Nordstrom, which was previously at 23.9%, will now be at 0%.

These are examples, of course, but it’s often the case that the pre-negotiated interest rates that debt management companies secure on your behalf will fall between 0% and 7%.

The IRS’s Viewpoint on Debt Settlement

If you enter into a debt settlement plan, one final hazard to be aware of is that you will have to pay taxes on the amount of money you saved.

For instance, if your debt was $10,000 and the settlement plan says you only have to pay $3,000, you will be required to pay taxes on the $7,000 you saved. If you are in the 25% tax bracket, you’ll have to fork over $1,750 to the IRS, because the government deems your $7,000 in savings as income.

Clearly, there are many pitfalls associated with debt settlement programs – from unexpected taxes to high fees and damage to your credit rating.

As a result, most consumers battling credit card debt and trying to become debt-free would be far better off seeking out the help and services of a reputable debt management firm.

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The Federal Trade Commission is imposing new regulations that will prohibit most for-profit debt relief companies from charging a fee before they have reduced a client’s unsecured debts.

The FTC says the rules, which take effect Oct. 27, will prevent consumers from paying large up-front fees for debt reduction promises that are not fulfilled. They do not limit the size of fees, only their timing.

The debt settlement industry says the rules will force most companies out of business because it will take at least a year to collect any fees.

Read the rest of this article on The Detroit News http://bit.ly/97bEuS

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If you get nowhere negotiating with your creditors, you’re drowning in debt, you’ve analyzed your budget, cut back on expenses, have implemented the suggestions found in Zero Debt, and have still concluded there’s no way you can afford to pay all your obligations, the good news is that a debt management program may help. The bad news is that many of them might also hurt you.

Read the rest of this post on The Zero Debt Online Course.

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Q: “I’m facing a garnishment if I don’t pay a company nearly $7, 000. I borrowed $1, 000 and defaulted on the loan. I called and asked if they would settle, they said ‘No.’ I received a letter stating that I must pay them in full, or pay 25 percent of my next paycheck, or they are going to go to court for garnishment. I can’t do either of their demands right now. I’m thinking about filing bankruptcy but I don’t want to. Can you give me any suggestions on how to handle this situation?”

A: Well, the first thing I would advise you to do is to get back on the phone, and try to negotiate with this company. Simply because you asked for a settlement and they said “No”, doesn’t mean that you should end your settlement talks or negotiation efforts there.

I’m at a little bit of a disadvantage to advise you specifically on the steps you should take because there are three key things that I don’t know, that you didn’t disclose to me in your email. One, I don’t know the state in which you are operating. Two, I don’t know what kind of debt this was. You said you borrowed $1, 000 and defaulted on a loan. Was this a secured loan, was it an unsecured loan? Was it a credit card, was it a line of credit, was it some other debt?

You also said that you face garnishment, if you don’t pay nearly $7, 000, but you said you borrowed $1, 000. So I’m curious as to why there’s seven times as much being asked. Was this a very old debt, from 5, 10, 20 years ago? That matters greatly as well. You need to know the statute of limitations or the time frame after which a company can legally come after you in court or try to pursue a judgment against you, or potentially a wage garnishment.

If in fact this is a very old debt, and the statute of limitations has expired in your state, then you may not have to pay anything at all.   In most states in the country, a statute of limitations for credit card debt, for example, expires anywhere from three to 10 years. Again, I don’t know what kind of loan specifically you took out. Whether it was a promissory loan, whether it was an oral loan that was made, I don’t know those particulars.

But I can say that what you should do is first look at the law in your area. Get pre-paid legal assistance if necessary or go to a legal aid society. That might be able to give you free to low-cost help, to determine whether or not the statute of limitations on this loan has expired.

Even if you find out that it hasn’t and that you do still legally owe something, at least $1, 000 that you initially borrowed. You should negotiate very aggressively to try to make monthly payments, but not to the tune of $7, 000. Again, clearly, they’ve added on interest, late fees, or charges of some kind to make your debt mushroom from $1, 000 to $7, 000.

So I would say, request to speak to a supervisor. Don’t worry about them saying, “You must give us 25 percent of your paycheck, or we’re going to take you to court.” I’m not saying don’t worry about the reality or the prospect of a wage garnishment. What I’m saying is that they don’t get to dictate how much you pay out of your paycheck. Only a judge can do that.

If they end up taking you to court, to pursue a wage garnishment, you would be able to tell the judge your financial circumstances. You’ve already said to me, “I’m thinking about bankruptcy, and that I cannot give 25 percent of my paycheck, and I cannot settle and pay in full.” So that tells me that you are cash-strapped. A judge would be able to be a neutral third party who would look at everything in its entirety. Your income, and your current expenses and obligations.

If you are issued a summons to go to court in this matter, do show up for court. That will protect your legal interests. And do make sure that you present your side accurately, in terms of saying what the original debt was — versus what they’re trying to get you to pay up right now.

I don’t think that bankruptcy is the preferred avenue for you, based on everything that you’ve described to me thus far. Especially because this was essentially a $1, 000 loan. And I would hate to see you have a bankruptcy which will last on your credit report for 10 years, just for a $1, 000 debt.

Here is some advice on how to know when to file for bankruptcy protection.

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Famed billionaire investor Warren Buffett once said that if you find yourself in a hole, the first thing you must do is to “stop digging.” It may sound basic, but every day, people with massive amounts of consumer debt continue to dig themselves deeper into the red by spending as if there’s no tomorrow. If you know you’ve been over-spending, you must vow to end negative spending habits. This is crucial to fixing your finances. Let me put it another way: if you’re serious about chucking your credit card debt, you have to put an end to frivolous or excessive spending – starting today!

So many of us tend to make empty promises to ourselves and others: promises that we’ll spend less and save more; promises that next year we’ll get our act together; promises that with the next promotion or the next bonus or the next money that comes in we’ll make good use of that cash – anything related to whipping our finances into shape. It especially happens at the beginning of the year. Have you ever made a New Year’s resolution concerning your finances? More to the point, if you have such a resolution going forward, chances are you’ll need all the help you can get to stay on track. The December holiday season is the time of year that many of us tend to overspend – leaving us with big credit card bills, and the equivalent of a shopper’s hangover that lasts well into the following year.

For those of you determined to better manage your money, you don’t have to live a life of deprivation in order to get into the black. The best way to turn your financial resolutions into lasting changes is to take some concrete steps that won’t cramp your style, but will definitely improve your personal finances.

Here are some ways you can do just that:  Read the rest of this post on The Zero Debt Online Course. It’s free!