People say approaching a debt settlement company would be a good choice to get relieved from debts. What kind of debt settlement companies should we choose?
The answer to the question “which debt settlement program should I choose?” is very simple: NONE OF THEM… but not for the reasons that most people offer. I’ll advise you not choose a debt settlement company because – even if you find a high-integrity, ethical debt settlement company – there is a far superior alternative: DEBT RESOLUTION. The concepts are similar, but Debt Resolution provides benefits that debt settlement can not offer, at a better price. I only have room for a limited explanation, but here are some of the key (very important) differences between debt settlement and debt resolution.
Basically, debt settlement companies act as a collection agencies for the credit card companies. They get involved before the creditor refers the account to an outside agency, collect a bundle of money from the borrower over time, take their hefty fees, and offer the balance to the creditor as a settlement. They are PRIVATE COMPANIES offering a service. They do not and can not represent the borrower.
Debt resolution, alternatively, is an attorney-managed process whereby an attorney negotiates with the creditor on the borrower’s behalf. This is a legal transaction that only an attorney can perform, and results in a settled mitigation on the borrower’s behalf. There are some critical advantages to this.
Key differences between debt settlement and debt resolution:
PERFORMANCE GUARANTEE – Debt settlement companies cannot guarantee a settlement amount. Debt Resolution guarantees settlement at 45% of the original debt (which also includes the attorney fees). Also, with Debt Resolution, no additional fees will be requested if the debt increases after the agreement is signed, which is very important because once credit card payments get behind, fees and rate hikes get applied to the account, significantly increasing the balance. Debt settlement companies may take advantage of this by charging fees on the balance when the account is settled, not the original balance. And since plans may take several years to complete, balances (and the corresponding fees) can increase dramatically.
TAX CONSEQUENCES – Debt settlement companies generally don’t point out to borrowers that when a creditor agrees to settle, they generally send the borrower an IRS Form 1099 for the amount written-off. This means that if the borrower has $50,000 in unsecured debt, and the creditor accepts 60%, or $30,000 as a settlement, they will send the borrower a Form 1099 which shows that $20,000 write-off as income to the borrower. Even though the borrower didn’t receive any actual cash from the creditor, they may still have to pay tax on $20,000 of additional income. With the attorney-managed Debt Resolution program, the resolved amount is a legal agreement between the parties, and since no cash was provided to the borrower in the form of actual income from the creditor, THERE ARE NO TAX CONSEQUENCES.
CREDITOR HARASSMENT – Debt settlement companies can’t represent a borrower, so they can’t really stop harassing phone calls from collection agents. They may explain that the borrower is in a debt settlement program, but that could potentially backfire and cause the creditor to accelerate their collection efforts, or even file a lawsuit. The attorney–managed Debt Resolution system leverages good faith debt laws to protect consumer rights. Once the creditor receives the first letter from the attorney, they are prohibited by law from pursuing collection efforts against a consumer who withholds payments due to a good faith billing dispute. If the creditor still communicates with the borrower, the borrower should notify the attorney, who will inform the creditor why they have no right to pursue further collection efforts.
FEES AND ALLOCATION OF PAYMENTS – Debt Resolution is, in most cases, significantly less expensive than debt settlement… and the fee structure is completely transparent. The Debt Resolution administration and processing is just 5% of the total contracted debt (compared to 10-15% or more that most debt settlement companies charge). And that 5% is based on the balances on the contract date, not the settlement date – so increasing balances will NOT result in increased fees. Debt Resolution also has a one-time $500 enrollment fee to establish the paperwork and accounts, and compensate the attorney for efforts to cease collection calls, etc… Some debt settlement companies don’t charge an upfront fee to enroll, but they “front-load” their monthly payments with fees – a majority of the payment for the first several months goes toward company fees rather than into the borrower’s settlement account (so they still get their money upfront). Some even charge monthly fees on top of their high percentage fee.
These are a few reasons why Debt Resolution is superior to debt settlement. If you’re interested in reducing your unsecured debt by 55% (guaranteed) and reducing your monthly payments by 50% or more, and want to do so while avoiding harassing creditor calls, surprise tax bills, and exorbitant fees, visit www.BetterThanDebtSettlement.com.
I am thinking about getting credit counseling and enrolling in a debt management plan. But I want to know if it hurts your credit score. There seems to be so many scams out there right now.
Yes, participating in a debt management plan through a credit counseling agency will hurt your credit, though likely not as much as some other alternatives. However, a debt management plan will take longer, cost you much more money, and may not significantly reduce your monthly payments or balances (but interest rates will probably be reduced). Generally, you’ll end up repaying 100% of what you owe, plus interest, but at a lower rate.
Whether it’s a good idea for you will depend largely on how much debt you have, your ability to afford the monthly payments, and how important your credit score is to you (and how much more you’re willing to pay to try to maintain it). Let me give you some examples:
Borrower #1 owes just $5,000 in unsecured debt. A debt management plan may be a good solution if he can afford the payments. He’ll end up paying back the full $5,000 balance plus interest, plus fees to the credit counselor- but his credit should not sustain as much damage as had a debt settlement company withheld payments from his creditors for months or years, hoping to force a settlement. In this borrower’s case, a debt settlement may have only reduced the balance by $1,000 – $3,000 dollars, which is a small consolation for having his credit score trashed. Plus, the fees to the debt settlement company would likely eat up a good portion of those savings. But let’s look at a different example…
Borrower #2 owes $70,000 in unsecured debt. Let’s say the DMP (debt management plan) is able to reduce her interest rate from 19.9% to just 5%. On a 60-month plan, her monthly payment (not including credit counseling fees) would be $1,321. That comes to a total of $79,260 (plus credit counseling fees) to pay off that debt at the reduced interest rate under the DMP. Her credit will be damaged while she’s in the program, but perhaps not as significantly as under a different type of debt reduction program. But what’s the cost? Let’s say another type of debt reduction program is able to resolve her debt for 45% of what she owes, with no additional interest accruing. That $70,000 debt is now able to be eliminated for just $31,500. And if she can manage to pay the $1,321 per month as she would under the DMP, her debt is eliminated in just 24 months (compared with 60 months in the DMP). So her credit is hurt for 2 years, but she’s now debt-free, and has 3 years to repair and rebuild it by making all her payments on time.
So let’s look where Borrower #2 would be at the end of 5 years under each option… with the DMP, she has just made her last payment (totalling $79,260 plus fees), is now debt-free and emerging from her damaged credit profile. Under the alternate program, her credit report shows that she WAS way behind on payments 3 years ago (which significantly impacted her credit score), but has been debt-free and making payments on time for the last 36 months (which has helped to rebuild her credit). Oh, and by the way, she saved about $50,000 by choosing this option over the DMP.
So you can see that it really depends on your individual situation whether a DMP through credit counseling is a good idea for you. If you only owe a small amount, it may be a good option. But if you have a significant amount of unsecured debt, you may want to weigh the additional cost of the DMP versus the savings that you can achieve through a debt resolution option.
However, I DO NOT RECOMMEND CHOOSING ANY debt settlement COMPANY, but not for the reasons that most people suggest. I’ll advise you not choose a debt settlement company because – even if you do (somehow) find a high-integrity, ethical debt settlement company – there is a far superior alternative: DEBT RESOLUTION. The concepts are similar, but because Debt Resolution is an attorney-managed program (as opposed to a private comany), it provides invaluable benefits that debt settlement simply can not offer, and at a lower cost. There isn’t room to go over the differences here, but you can check out my answer to this question (copy & paste in a new browser window):
http://answers.yahoo.com/question/index;_ylt=AhQIdMaQHurT6MMwgtm9FM7ty6IX;_ylv=3?qid=20100301082225AAYrSCm&show=7#profile-info-s1OLajFVaa
To find out more about how you can reduce your unsecured debt by 55% (guaranteed) and reduce your monthly payments by 50% or more, and do so while avoiding harassing creditor calls, surprise tax bills, and exorbitant fees, visit www.BetterThanDebtSettlement.com
www.needhelpwithbills.com
I have over $20,000 of credit card debt. I am able to pay them off slowly now, but I am thinking of consolidating everything with a debt management program. This program said they will close all my accounts and all I have to pay is a low monthly payment of $500 a month for all my credit cards. Is this a good deal? I am not sure. Thank you for reading and thank you for your time.
This is not a good deal. Reducing your payments will not save you anymore at all, infact, often times you will end up paying more in the long run.
The only way a debt consolidation loan is a good idea is if you get a lower interest rate, but continue to make high monthly payments, so more money is going towards principal rather tha towards interest. This is the only way to pay off more of your debts…applying more money towards the principal.
If you don’t go the route of the consolication loan, make extra payments on the smallest debt only…make as big of a paymnet as possible on this one, while maintaining the other minumum payments. When that debt is paid off, move that entire payment amount onto the next smallest debt. COntinue doing this until it’s gone. Again, the key is to make sure the monthly payments stay high, you’re just transfering the payments from one to another as they get paid off. This is the "Debt snowball" strategy that most debt management companies recommend and is also promoted by people like DAve Ramsey, and Richard Kiyosaki.
I am going through a debt couseling service to consolidate my high interest credit cards, will this hurt my credit score?? Through this agency I can only have 1 open credit account — which is fine, I am SICK of credit debt, but what about buying a vehicle?? WOuld I be able to get financing??
I run a real estate title agency. The Mortgage Broker’s I’ve spoken to have one answer to that. Dont’ do it. Even tho you eliminate debt and multiple credit accounts which should improve your credit, the mere fact that you have a debt service on your credit means most people wont’ touch you with a ten foot pole. You are better off filing bankruptcy. Even with a bankruptcy on credit you can still get credit. Just at a high interest rate. With debt consolidation. You may not be able to get credit at all.
I think the reasoning is that these debt services essentially eliminate any profit these creditor’s can make off of you. So there is no reason for them to give you credit again.
And when I asked about this the dont’t do it answer was a strong one. Not just offhand advice.
I have debt problem and still now it is manageable. I just want to know the use of debt consolidation program. Is it really effective?
Yes, debt consolidation program is effective in some situation. debt consolidation programs are usually just a big loan that pays off other smaller loans. Sometime this program helps you or hurt you, which depend on your situation. You should also be aware that you may end up paying more total interest if you use a debt consolidation loan.
I mean i heard after 6 years or so your credit card debt is written off, but if during those 6 years you get letters from different solictors, agencies etc does this include the 6 years or is it restarted from the beggining when to a another agency?
I’m not sure if you are asking about the reporting time line or the statute of limitations so I will address both.
Derogatory accounts show on your credit report for 7-years from the date of first delinquency. It is illegal to re-age debts.
The statute of limitations however can be restarted if you pay on a old debt or in some States be even admitting that the debt is yours.
Is is wise for me to use my mutual Roth Ira to help me get out of debt. I’m 56 yrs old and need to pay off some credit cards rather than go to debt settlement or consolidation. Is this wise?
Step #1 to financial health is to eliminate all debt!!! You should always start off with any savings, if savings are exhausted and you cannot afford monthly payments to eliminate debt then you should use your Roth, contributions are always accessible regardless of age without penalty, but be careful because interest is not tax free until 591/2. Once your debts are eliminated you will have freed up cash flow to begin contributing again to your Roth.
Note, if your investments are yielding less than the interest expense of your debt than you are moving backward, so pay them off and start moving forward.
Don’t look back!!
For more information visit my website at www.vanbureninsurance.org.
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So I have a Bank of America Visa with about $6,300 at 13%. The account was closed by a debt management program. And I have been paying monthly payments through the DMP. I want to make a payment on the Visa more than the monthly payment. But I cant pay the entire balance.
I wanted to pay about $1000. Just to reduce the principle. But I remember the Credit Counseling told me not to do so. They said it shows that I have money and BOA might not abide by the agreement anymore.
Do I trust the Credit counselors? Or make a payment to BOA directly?
And do you think credit card companies are evil? JK
I would actually say Yes, abide by the credit counselor. card companies are famous for retracting settlement amounts and monthly payments, especially if they see that you have money. They will question why they made the settlement. It is good that you want to pay more now, but in the eyes of the creditor, they will se it as, "why wasnt it paid like this originally?"
Think of it this way, you make the payment you are thinking of making now, and BOA breaks the settlement agreement, in a few months you run into a bad spot again, and can’t pay what they are expecting you to pay, interest piles up again, the guy below me did not think of that. BAD ADVICE. My info is coming from someone that owns a collection agency, and knows the result of what you are talking about. I work with debt counselors everyday, and although at times they seem to not know much, a good portion of them are VERY knowledgeable.
I want to consolidate my debt I don’t hae a lot, like less than $5k but I keep hearing that it’s like a step above/below bankruptcy? should I just try to do it on my own.
Also what website can I go to where I can breakdown of income, expenses and then leftover amount if any INSTANTLY without having to wait for someone to get back tome?
I know some are saying do a budget but those websites go a step further and suggest how much I should be paying to get the debts paid off faster.
There are several ways to do this. There are several services that work on your behalf to negotiate the debt down and put you on plan to pay the remaining debt within (for example) 12 months, etc. but this option may only be for those with extreme cases. There will be a short term negative impact on your credit record but will it will improve "if" you successfully complete their program and pay the remaining debt down. www.bills.com is a reputable company that provides this service but do your research and make sure they have good standing with the Better Business Bureau and other consumer organizations.
In regards to your question of a place to breakdown monthly income expenses. Start by doing your own math: 1) how much do you make a month 2) list your monthly reoccuring expenses (e.g., rent/home, car, insurance, utilities, est. groceries, list an allowance for misc.) 3) do the simple math of of deducting all items in step #2 from step #1 this gives you an approximate of left over income but usually somewhere we all overlook some expenses 4) list your credit card debt(s) and estimated monthly "minimum payments" (note: never pay only the minimums or you will never get out of debt). 5) Compare the margin of home much income you have remaining from step #3 and that with the credit card debt in step #4. This will give you a general direction on how much you are able to pay. The debt consolidation companies will walk you through this.
hope this helps.