What about Debt Settlement?

Debt settlement has been referenced by many mistakenly as debt consolidation or debt management. In reality debt settlement is the process of negotiating with creditors or collectors in a systematic approach to reduce the amount paid to creditors by the debtor.

Debt settlement is an art as well as an administrative task. The debt negotiation portion is where the art comes in, but luckily we have brought even that down to a fairly accurate science but every case will always be different that's why the negotiation approach should be carefully considered. It really depends on the hardship of the debtor.

If the debtor hardship is legitimate, the chances of receiving a good settlement are higher. Some have tried engaging in a debt settlement fraudulently because of the hype in advertising, which does not correctly describe the necessary conditions to meet other than just saying that they don't like their high interest rates.

The administrative portion comes in to play because these negotiations require a systematic approach to be effective and to receive settlement offers. Not only does the debtor look for settlement offers but is seeking a main end goal: to eliminate all credit card debt completely.

The idea of a debt settlement should only come to mind when a debtor has no other options. Therefore, a debtor that can maintain other options such as paying the debt off systematically living within a budget, or signing up for a credit counseling program, should definitely do so.

What about Debt Consolidation?

Debt consolidation is really effective as an exception to some people, rather than to a large majority. If a debtor is struggling financially the chances of receiving favorable rates are slim to none, negating the reason for the loan to begin with.

Where does Bankruptcy fit in?

A debt settlement process should really be an alternative to bankruptcy.

Consider this:

Bankruptcy law changes have made it more difficult for consumers to qualify for a chapter 7 bankruptcy requiring the debtor to find other means for handling their debts. Since a debt management program, or credit counseling, normally requires a monthly payment of around 2-4% of the debtor's total debt over a period of a few years, those who have been struggling with their current arrangements will find a credit counseling program difficult to maintain. Indeed, a sizable majority of debtors who enter a debt management or credit counseling program end up dropping out, having wasted precious time and money, and bringing them back to the same situation as before.

Unless a debt management client's financial situation has improved due to an increase in income or elimination of a large expense, such as medical bills, these debtors are now prime candidates for debt settlement.

Furthermore, there is the stigma of bankruptcy. The label is both personally and economically crippling to the debtor, eliminating the chance of a quick rebound and by doing so, getting back into a contributing factor to the welfare of the economy.

Debt Settlement is an Economical Solution

Debt settlement as it is has been the market's response to real needs. It is a more natural alternatives as settling accounts requires the inputs of both the creditors or collectors, as well as the debtor's, to meet at a halfway point where both stand to gain the most out of a situation.

In this area, debt settlement triumphs over all other debt solutions, unless of course the debtor is on the long tail of the curve on either side for bankruptcy or credit counseling. On average however, most of these debtors stand to benefit more with a debt settlement program.

The debtor has really limited choices in regards to choosing their debt settlement option. Considering that the industry standard fee is 15% of the total debt alongside some sort of monthly fee, this limits who would benefit from such a program. That's why most debt settlement companies advertise that they only take debts over $10,000.

The fees in the debt settlement industry have been the subject of constant scrutiny, not only from clients, but also from state and federal officials. Federally, the FTC has intervened multiple times for misleading advertising on behalf of sales, or front end companies.

Misleading Advertising and Industry Fees

Advertisements such as "Government Approved" and "Your Debt Bailout" will mislead anyone in believing that they will actually be "bailed out." Although a large majority of debt settlement companies actually provide the settlement services, they go no farther. Debt settlement companies will go only as far as negotiating your debts, but will not represent you in court should you be sued by your creditor.

The shortcoming of this model is that it does not really warrant the price tag. A debtor that has enrolled $100,000 of unsecured debts into a debt settlement program will have to fork a fee of $15,000 plus monthly fees over the course of the program.

Even though a debt settlement company may achieve settlements to the amount of 40%, chances are that

1. The debtor will be sued
2. If the debtor is sued the chances of a favorable settlement (under 60%) will be extremely unlikely, and
3. If left to fend for their own, the debtor might end up in wage garnishment territory

This is where the "Bad Press" for debt settlement comes in. if debt settlement companies are not successful with a lawsuit, the debtor has paid thousands in fees for a service that only landed a judgment on their credit and has left them with a garnishment and the risk of bankruptcy now even higher.

This is where you hear the stories of debtors who "signed on with a debt settlement company just to end up filing bankruptcy." And has not had those thousands of dollars refunded.

Industry Watchdog Associations

This is the unfortunate dilemma good actors in the industry must face. Industry associations such as USOBA and TASC have sprung up as a self regulating watchdog, but as anyone who visits these conferences will notice: there are 200 companies at the conference, but over 7,000 debt settlement companies nationwide. And the 200 companies are the "Good Actors."

This is unfortunate because should these 200 companies been the only actors in the industry, with only a dozen "bad actors" the debt settlement industry would have already figured a way to settle thousands of consumers' debts efficiently, and have increased our nation's welfare more rapidly, stemming a quicker recovery and credit worthiness of consumers.

Can Debt Settlement Fees be avoided?

A note on the debt settlement fees; these can be circumvented with the help of a do it yourself debt settlement system or program that would educate consumers how to settle their own debt, and in the process learning how to take control of their finances through action, and saving thousands by not going through debt settlement companies who lack a proper servicing structure anyway.

Industry Shortcomings

Here are areas that the debt settlement industry has yet to address:

1. Clients are signed up by commissioned sales people that sometimes have little regards towards the client's true financial situation. Even if they are not behind on their bills yet but are "struggling with debt" they will pressure the prospect into a debt settlement program.
2. While in the program, the client is not provided any continuing education and coaching while they are in a financial hardship.
3. Often times, the clients will call in anxiety about a collector call and the debt settlement company will take days or sometimes not even return the calls
4. There is a lacking feedback mechanism to the client about the progress of their debt settlement. This is because progress is achieved over the course of months rather than days, but the feedback mechanism is as crude as, calling the client and informs them they have received a settlement offer from a collector and that they should take it. Debt settlement companies have to address this gap.
5. Their fees are charged up front. This is a tough issue for settlement companies to address, as they cannot wait 2-4 years to finish the clients' settlements to get paid. And what if the client doesn't pay? Will they now become collectors? However, it is hard to justify taking all their fees over the course of the first year, and then finally getting settlements later as opposed to sooner because the client was making payments towards fees rather than towards their savings account.
6. There is little to no help if the client gets sued-oftentimes the client will be sued and the company will sometimes offer a response letter for them. But if an agreement is not reached the client will have to go to court with the words "well you knew you might be sued so you need to go to court on your own and figure it out" resonating in their heads.
7. Finally, there is no debriefing for a completed client. This is important because when a client has completed a debt settlement program they are left to go about the world just like when they started. Clients should be pointed in the direction of how to use their newly found debt free load and how to regain creditworthiness.

Expect your credit score to go down

The biggest negative consequence of a debt settlement program will be on debtors' credit. But that's expected as the credit was the only thing that was tied to the loan; hence it's referred to as unsecured. It's important to understand this for several reasons:

1. Your credit score should be an accurate indication of your creditworthiness. And someone with too much debt but a good FICO score will tend to hang on to a lost cause just because they think the situation is salvageable, when in reality they start paying a premium for that credit score that will not help them either way.
2. Your credit score is a risk instrument for debt. Meaning, that the only reason a consumer needs a good credit score is to get into further debt (some instances to find jobs). If a consumer is struggling with debt and is looking to get out, their last priority should be related to an instrument that only helps them get into more debt.
3. The credit score will suffer by having late payments reported on their credit such as, 30 days late, 60 days, 90 days, until charge off. This is a legal limitation where the creditor must write off the debt off their books.
4. Once sold to a collection agency, the collection agency may choose to settle, in which case the credit report will show that the account has been settled.
5. If a debtor is sued and receives a judgment, the judgment will stay on their credit report for up to 10 years.
6. Lastly, one of the upsides of a successful debt settlement program is that once all debts have been settled, the former debtor (yes you are debt free) can start the process of rebuilding his credit. The length of a complete credit repair can vary anywhere from one and a half years on up. It depends on the consumer's resolve and discipline to rebuild it.

What about the collectors?

Ah yes, the collectors. It is rather misunderstood who the collectors are, and why people dread them. Collectors can be the best thing that happened to consumer who is seeking a good settlement offer. In fact, the whole debt settlement industry has sprung up on the basis that collectors started settling more and more debts.

When an account is charged off it is assigned to a collection agency that has either purchased the debt for pennies on the dollar or has undertaken collection activity on compensation by results basis, meaning they get paid if they collect. The reason why collection agencies have an incentive to settle is this:

Collection agencies collect on an account that has been bought by a debt buyer. These debt buyers buy consumer's outstanding debt for as little as 4 or 5 pennies on the dollar owed because they are confident they can collect on average enough to be very profitable.

Why are they so confident?

Because they have perfected intimidation and collection techniques to a very effective science.

The Debt Settlement companies step in and provide an effective service as they are aware of collectors' techniques and are able to maneuver around them to reach a settlement that is beneficial to the debtor, and is also beneficial to the collector, who has just make close to 1000% profit on that particular debt.

The FDCPA limits collectors' tactics and ensures consumers who are being collected on have their own rights.

What debts does a debt settlement company negotiate?

First let me state that debt settlement can be applied to ALL debts, both secured and unsecured. It is better know today to cover only unsecured debts, as debt settlement on secured debts is much riskier for the chance of losing the property (an example would be a loan modification).

The debts that legitimate debt settlement companies will undertake include:

-Credit Cards (including department store cards)

-Personal loans that are not secured to any property

-Medical Bills

-Student Loans (although these should be negotiated by an attorney)

-Repossessed car loans (after the car has been repossessed)

-Any debts that have no securities tied to them.

Debt settlement companies are extremely efficient at getting good settlements on these types of loans, but only if they debtor's hardship is legitimate.

So who really qualifies for a Debt Settlement Program?

There is an ideal candidate for debt settlement and that falls based on the debtor's personal situation. The most favorable situation is where the debtor has no real assets, a legitimate hardship, and little to no income. These consumers you might even consider uncollectable so a settlement of 1% would be feasible.

The worst candidate for debt settlement, is someone with many assets, a questionable hardship, and an income that is considered more than sufficient.

However, most debtors who are looking at a debt settlement program fall somewhere in between. Even though speaking to a REAL debt counselor these days is very hard to do (they are all sales people), consumers should ask themselves these questions:

-what is my hardship?

-what are my assets?

-what is my income to debt ratio like?

-how is my credit score? (If it's already bad then you have less to lose)

-how high are my debts? (the higher the debt the higher the chances of being sued)

-am I prepared to take those collection calls (they will come no matter what)

-am I prepared to go to court and plead my hardship with a judge?

-am I willing to adjust my budget to live on a cash only basis?

-do I need to buy/lease a new car in the next couple of years?

-do I need to move/buy a home?

-will I need to use my credit for anything NECESSARY (as in you can't live for a few years without!) in the next couple of years.