Debt-Free Forever (26 page)

I
f you’re drowning in unpaid bills, if you’ve got loans in collections, or if you’re watching your credit history go to the dogs and wondering how you’re ever going to climb out of the hole you’ve dug, you may be tempted to take advantage of a debt-settlement company’s offer to “save thousands and get collectors off your back.” According to the Stats Man, household debt-to-income ratio reached a record high of 148% in the third quarter of 2010. We finally succeeded in outpacing our American cousins. No wonder there are so many debt-settlement companies popping up all over the place. More people are way over their heads in debt and dreaming of a quick and easy way out.

So what exactly is debt settlement? It’s negotiating with creditors to “settle” what you owe for less than you actually owe. You come up with the cash to pay off an agreed-upon amount, and your creditor waives fees and interest, and even reduces what
you owe to make the whole thing work. Depending on how motivated your creditor is to settle with you, you could save anywhere from 20% to 75% of what you owe. So if your total unsecured consumer debt adds up to $35,000, you could save anywhere from $7,000 to $26,275. Have I got your attention?

That can’t be right Gail. Why would a creditor let anyone get away with only paying 25 cents on the dollar?

It’s a little-known fact that for people who are falling further and further behind on their bills, creditors would rather settle the debt for a lump sum of cash than run the risk that somebody will go bankrupt and they’ll lose even more.

GAIL’S TIPS

There’s nothing shady or underhanded about debt settlement. It’s a perfectly legitimate way for borrowers who are overextended—but want to avoid bankruptcy—to deal with their debt. But you have to be tenacious. You have to have the will to succeed.
And you have to fight like hell to get what you want.

Creditors aren’t all that happy that people know this option exists. And they can make it very, very hard to execute the strategy. That’s one reason why debt-settlement companies have made such inroads.

Some folks think that they don’t have it in ‘em to take on the fight. I think for what’s at stake, you should be prepared to go nose-to-nose with your creditors. Yes, it will be hard. Yes, your stomach will be in knots and your hands will shake. But do it! It’s your money and you should be prepared to fight hard to keep as much of it as you can. Remember, having someone else negotiate your debt settlement comes with a significant cost. So while it might look like the easy way out, you could pay through the teeth. Don’t assume the “free consultation” means you won’t have to pony up with some serious money once you’re into the debt-settlement process. You must weigh what the debt-settlement company will save you against what you’ll pay for its services.

Debt settlement isn’t right for you if:

• You owe money but have been keeping up with the payments, and have a bright, shiny credit history (and the accompanying high credit score). Choosing debt settlement will mean your credit history is going to get very badly bruised. Settling even one debt may lower your credit score, sending a message to lenders to up the rates on all your other debt because you’re a bigger risk.

• You have secured consumer credit. You can’t use it to try to reduce what you owe on an asset that could be reclaimed

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and sold, like a car. (However, if the car has already been repossessed, you could try to settle any amount you’re still on the hook for.)

• You may need to work with the company in the future. They’ll have your picture on their wall of “most-hated customers ever.”

• You are current on most of your payments. Creditors won’t discuss settlement if they think there’s any likelihood that they’ll get the full amount back, along with all the fees and interest they’ve been charging. So if you only have a couple of bills that are behind, but you’re keeping up with many others, debt settlement probably won’t work for you.

• You’re insolvent. If you don’t have enough money to pay any of your bills, no way to raise money, and no way to make more money, debt settlement isn’t for you. You need to go see a trustee in bankruptcy to talk about your other options.

If you’re not prepared to declare personal bankruptcy or work with a trustee through a credit proposal, you’ll have to bite the bullet and do the work to dig yourself out of debt. Just follow the plan I’ve laid out for you, and you’ll get there.

Debt settlement may be right for you if:

• You’ve been sent to collections or you’ve fallen three months behind on most of your bills. Your credit history is already in the dumper, so you don’t have to worry about making it worse. Know that you’ll need to be about six months behind to make the negotiation work, but this is a good time to start planning.

• You have the money to pay some but not all of your bills, and you have more than $10,000 in unsecured consumer debt (don’t count your mortgage, car, or student loans in this $10K).

• You have a couple of bills that have gone to collections. Your credit rating is already crap, so you might as well bundle all of your debt into a settlement.

• You’ve come into some money recently, or you can find a way to raise some money to settle with creditors.

• You want to be done with your debt so you can start fresh and get back to the business of building a good credit history. Keep in mind, correcting your credit history won’t happen overnight. You must be patient and diligent.

If you’re late on bills, if you’ve been sent to collections, or if your credit history has already gone down the crapper, you’re a great candidate for debt settlement. The first decision you’ll have to make is whether to go to a debt-settlement company to ask for help or do it yourself.

To help you decide if working with a debt-settlement company is right for you, you need to understand how debt-settlement companies work.

When you enrol in a debt-settlement plan, you’ll be advised not to make any payments to the unsecured creditors with whom you plan to settle. Instead, you will be saving money to build up your “debt-settlement fund.” This accomplishes two things. First, you’ll accumulate the money you need to settle
your debts if your proposal is accepted. Second, your creditors should become more willing to accept your lump-sum payment, or your payment plan, as your debt becomes “older,” since that usually indicates a greater likelihood of default.

Once you are at least six months in arrears, your debt-settlement company will get in touch with each of your creditors and try to get them to agree to accept pennies on the dollar for the debt you owe. They’ll try to arrange one of two debt-settlement plans:

•1. The lump-sum repayment plan. Your debt-settlement company negotiates a plan with each of your creditors to repay a percentage of your debt in a lump sum, which you have to come up with.

2. The monthly payment plan. Your debt-settlement company negotiates for a reduction in interest rate, fees, and principal owed, and you make payments monthly to the debt-settlement company, which in turn remits those payments on your behalf. This is my less-favourite option for debt settlement. If you are going to do it this way, you’d be better off going to credit counselling and getting their help. Their agreement is binding on your creditors (the debt-settlement company’s isn’t), and they won’t charge you an arm and a leg.

If you decide to work with a debt-settlement company, make sure you understand what ALL the fees will be. Get it in writing, with a statement that explicitly says these are all the fees. Trying to figure out the industry’s fee structure is like
walking through a maze, so don’t assume what’s true for one company will be true for another. Some companies charge a percentage of the total debt—typically anywhere from 15% to 20%—once they’ve secured you a settlement. Some charge an initial sign-up fee and monthly service charges. Some charge a flat monthly fee throughout the entire process. Know what the fees will be before you sign on.

GAIL’S TIPS

The biggest thing you need to know is that the repayment plan negotiated by a for-profit debt-settlement company isn’t binding on your creditors. Creditors can participate voluntarily, but if they change their mind, they can start legal action
against you. At this point, there is not a damn thing your debt-settlement company can do for you. If you’ve paid fees upfront, you can kiss that money goodbye. Your debt-settlement company is supposed to return the money you’ve been accumulating in their hands, but many take their fees out of that money, so you may not get back as much as you thought you would. And since you haven’t made any payments on your debt in the past several months, you now have a really big problem. Your credit score is in the tank, your history has multiple blemishes, and the collection calls will come with a vengeance. You’ve got to get busy sorting out the mess. Not all debt-settlement companies are created equal, and you’d best do your homework before committing to working with one so you aren’t left holding the bag. If you choose to work with a debt-settlement company, make sure you know the facts. There’s no standard accreditation or licence for debt-settlement companies. Do your homework, check references, and make sure you’re working with a reputable firm. If you want a repayment plan that is legally binding on your creditors, go see your local not-for-profit credit counselling branch or visit a trustee in bankruptcy to talk about making a Consumer Proposal. With either of these, interest will stop accruing, collections agencies won’t call, and creditors will have to stick to the plan they accepted unless you mess up.

You also need to understand that the “free if we can’t settle your debt” promise is a wolf in sheep’s clothing. Working with a debt-settlement company means suspending your payments until you owe enough to the creditor to put the debt-settlement company into a good negotiating position. So while you
may not owe the debt-settlement company anything, falling behind comes with a huge cost:

• Being behind on payments will trigger interest and fees, and may even trigger a higher rate of interest to kick in.

• Once the late payment is reported to the credit bureau, it will affect your credit score negatively. A lower credit score may, in turn, trigger higher interest rates on other debt (like your mortgage at renewal or your secured line of credit), even though you’re up to date with those payments.

If it turns out that creditors are unwilling to accept the debt-settlement company’s plan, the debt-settlement company can walk away from its deal with you, waving its “we won’t charge you” promise as your consolation prize. But you will now be even further behind, you will have totally ruined your credit history, and you’ll be back at square one in trying to solve your debt problems.

Once you enter into a debt-settlement agreement, get ready for the collection calls. While some debt-settlement companies say they’ll help you avoid the horrible and unrelenting calls from collections agencies, this isn’t a done deal. In fact, some creditors who realize you may be working with a debt-settlement company will escalate their collection attempts. If the creditor takes legal action, the debt-settlement company may drop your account.