Tuesday, May 3, 2011

Debt Settlement

This article is based on my personal experience with debt settlement. I don't represent any companies.

Unless you live under a rock, you've heard commercials advertising debt settlement companies. What? Doesn't ring a bell? Maybe that's because you heard about some secret government stimulus program aimed at people with credit card debt. Or, some 'secret' to reducing your credit card bills. These commercials refer to the same things, debt settlement companies. These companies all do the the same basic thing, collect a monthly fee from you and after you build up enough money in a special purpose account they offer your credit card companies a settlement.  This is NOT for everyone, there are quite a few downsides. Before considering debt settlement, let's look at the alternatives:

1) Debt Management Plan (DMP)- These are managed by 'credit counseling' type companies. They are non-profit organizations often times funded by credit card companies. They will put you on a plan to repay all of your credit cards in a short amount of time (around 3 years) by getting the credit card companies to agree to lower interest rates. If you can pay your minimum payments without any problem, but just aren't making progress on the balance, this is a good solution. It's impact on your credit is minimal.

2) Debt Consolodation-  This is just a fancy name for taking out a loan to pay off your credit cards. Often times it involves a second mortgage on your house, a loan against your 401k, or some other type of loan. Because the interest rate is much lower, you are able to pay the loan off faster. This would be a fantastic solution for someone who is very diciplined with their money, but most people in over their heads with credit card debt are not. The huge risk here is that your credit cards are now paid off. Yea, I know, you've learned your lesson, but all it takes is an emergency that starts the charging cycle all over again. Usually this is a bad idea.

3) Bankruptcy-  This is actually a pretty good idea if you are able to file for Chapter 7. There are limits as to how much you can make a year, and you can only file once every 8 years. Believe it or not, you will have better credit after Chapter 7 bankruptcy than with debt settlement. Avoid Chapter 13 bankruptcy, it has a high failure rate and requires you to make high monthly payments to pay off your debt.

So who should use Debt settlement? People in WAY over their heads with credit card debt who can't file for bankruptcy and people who can't afford the paymenets in a DMP. If you've decided to do debt settlement, you need to be aware of a few things.

There are MANY rip-offs out there. When I started researching debt settlement companies, most of the companies had no history, weren't known by the BBB, were doing business as a different company, etc. I'd forget any company that advertises with those crazy commercials I talked about earlier. A company that has misleading advertising is probably not a reputable company. I spent some time on debt forums reading peoples experiences and settled on a company called Superier Debt Services, who had a good reputation. I'm sure there are other great ones out there, make sure you check them out with the BBB. Also, google their company name, if you don't find anyone on google saying good things about them, forget it.

Keep in mind that the settlement company is going to take a percentage for their service. When you decide to do debt settlement, don't stop paying your credit card company until you start paying your settlement company. You want to get as much possible money in your account so they can settle debts before they go too far in the collection process. Put extra tax refunds or work bonuses in your account. The more money you put in, the faster you'll get out of debt.

Be prepaired to get sued. Most companies will not sue you, and if they do it will usually take them close to a year or longer to decide to do so.  A good settlement company will know the warning signs, a collection attorney located in the same state as you is usually the biggest red flag. They will settle with you, but obviously you need to have money to settle with in your account. If you do get served, don't just let it go to court for a default judgement. You may think "What can I do?  I owe the money?" True, but you may not owe the excessive collection fees and interest tacked on top. Even if you do, the longer you stall the process (which takes a LONG time), the better you will be prepared to offer a settlement. It can take months for a trial date to be set after you file answer, for example. Your debt settlement company may be able to offer you assistance in drafting an answer. If they can't, it should cost very little to have an attorney help you draft one. Don't panic! Yes, getting sued is nerve racking, but the whole idea is to get your debt settled.

Collections and your Credit
You will be bombarded with collection calls and letters. Ignore them. There's no point in arguing with a company you can't pay. Your credit will also be adversely affected. As debts get settled, it will improve.

Given all of these considerations, debt settlement may be the right option for some people. In my experience, I've been able to settle almost all of my credit cards in the two years I've been in a debt settlement program. I've been sued a couple of times, but was able to settle them before they went to court. I have two credit cards left and plan to be debt free by the end of the year. The biggest mistake I made was not paying my credit card bills for 6+ months before signing up with a settlement company, which put me much farther behind than if I had been paying in the entire time.