Why write a book on how to settle debt yourself?
I decided it was time to take the mystery out of debt settlement and give people the real scoop from insider experience. As I said in the introduction, the debt settlement industry has had its share of hard knocks and changes over the years. Debt settlement isn’t brain surgery, but it does require A LOT of knowledge to do the job right. If you knew everything that I know about debt settlement, then you can do-it-yourself and not have to depend on a company that may or may not know how to get you through a program. In some cases, it could take 24 to 48 months to get through this process, unless you have thousands of dollars sitting in an account where you can settle all your debt today. That’s probably not why you started reading this book. You never know if a debt settlement company is going to be in business for two to four years. If you’re paying upfront fees, which are illegal, then you don’t know if they’re going to manage your account in the years to come. They may decide to take your money and run if you pay upfront fees. Besides, what’s their incentive to continue working on your account if they have no money to pay their employees? That’s right, none! If you have the time, patience, and the stomach for it, you can save yourself thousands of dollars. Wouldn’t that be better in the long run? I thought you'd say yes to that one.
Too many consumers feel overwhelmed by their debt and think there’s nothing they can do about it. There’s so much conflicting information on the web that some consumers find themselves in worse financial situations as a result of false or incorrect data.
Before we get started, make sure that you read this book all the way through before you begin negotiating your debt. Debt settlement is not a recipe with six simple ingredients. Each person’s financial situation is unique. Some of the content you’re about to read may apply to you in a different manner than say, your neighbor or family member. I want you to read, digest and then apply the information to your financial situation, and then read it again if necessary. You’ll be more prepared to tackle your debt and handle it for good.
DEFINING DEBT SETTLEMENT
Debt settlement is quite different from any other financial service out there. Essentially it’s a process in which an arrangement is made to pay a percentage of the amount owed. The actual settlement percentage worked out depends on a number of variables including, how old the debt is, how large the balance is, and how eager the creditor is to get paid. Most creditors won’t negotiate on current accounts. This is important! If you called your credit card company and asked for a reduction if you paid the account today, and were current with them, they’d probably laugh in your face.
Q: Why would they accept a settlement on an account that’s current?
A: They wouldn’t, it doesn’t make sense for a bank to take a settlement if a consumer is paying currently. Paying high interest rates and fees is where the banks make all their money, so it’s very rare to get any bank to give a settlement on a current account.
Typically, when a debt’s settled, the payment to the creditor is made in one lump sum or less than three payments. The standard percentage to settle can range anywhere from 40-60 percent off the principle; however, I’ve seen settlements as high as 93 percent off. For example, if you owed $20,000 on a credit card and settled it for 40 percent, you’d pay $8,000. That’s a savings of $12,000! Here’s another example:
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$23,000 original debt
-$7,000 settlement amount
$16,000 total savings
When a creditor accepts a settlement offer, he forgives part of the debt.
Q: Why should a creditor agree to such an offer?
A: Creditors understand that a consumer can go bankrupt if their financial situation is poor and in some cases hardly recover any money from the consumer at all. Creditors lose money in Bankruptcy cases, therefore they’re more inclined to agree to a settlement.
In addition, creditors get a hefty tax break if they’re unable to collect a debt within a certain amount of time. The creditor stops its collection efforts, declares the debt uncollectible, and reports (to the IRS) any amount unpaid, as lost income.
Debt settlement is good for a creditor since they get a considerable portion of the original debt (around 50 percent in most cases.) Therefore, settling debt is beneficial for both the creditor and the debtor.
Determining Whether Debt settlement Is Right For You
If you already know Debt settlement is the path you want to take, skip this section. For those who are still unsure, let me ask some questions.
• Are you paying $25-$100 extra every month, but your balance never goes down no matter how hard you try?
• Are you getting over limit and late charges?
• Are your interest rates rising?
• Are you spending 40 percent or more of your monthly income on credit cards or loan payments?
• Are you delinquent on your cards and the balances get bigger with every month’s statement?
If you answered “YES” to any of the above then I can safely assume that you’re in need of financial help. The best way to determine whether something is right for you is to get all the information so that you can outweigh the good with the bad. Whether it’s buying a new car, changing jobs, deciding on a new boyfriend or girlfriend or looking for financial assistance, you’ll have to do your research in order to make a decision to change what you’re doing. Let’s take a look at the advantages and disadvantages so that you can decide for yourself exactly what you’re going to do about your current predicament. If in fact, you have one.
Advantages and Disadvantages to Debt settlement
The notable advantage is paying less money than originally owed; however, there are some important factors to keep in mind before proceeding with debt settlement.
ADVANTAGES
SAVE TIME AND MONEY: A debt could be reduced by 10-90 percent in some cases. Imagine that for a second! We’re talking hundreds or thousands of dollars. In addition, you could settle your debt in a few short years or continue making minimum payments for the rest of your life. Think I’m kidding? For some people out there, they could be paying their debts until the day they die.
AVOID BANKRUPTCY: Bankruptcy affects a credit report for 10 years or more. It’s usually the last straw for people and doing debt settlement can be a way to avoid bankruptcy altogether.
IMPROVED CREDIT RATING: While it’s true that credit gets affected by being delinquent, every time a debt is settled, the credit score should naturally improve.
MONEY FREED UP: The ultimate goal is to be debt free. By settling your accounts, you’ll eventually have more money in your pocket, instead of wasting it on minimum payments and interest. Whether it’s to start saving for that vacation to Europe, buy that brand new car or finally remodel that old late ‘70’s kitchen, the money will be there to enjoy.
AVOID PAYING CREDIT CARD DEBT FOR THE REST OF YOUR LIFE: By law, credit card companies have to give the amount of time it’ll take to pay off a debt. The longest amount of time I’ve seen is 108 years if only the minimums are paid. That was on a debt that a 50 year old woman had, so my question is;
Q: What company in their right mind would give a 50 year old consumer a loan for over a hundred years?
A: That’s right! All of them, that’s how they make their money, with the interest they charge. They want to keep customers, literally, for life.
DISADVANTAGES
CREDIT SCORE: Unless payments are already behind, the credit score will be affected. Anytime a bill isn’t paid on time it will lower the credit score. If all the credit cards are current, but debt settlement is worth perusing, then this point is going to be a big factor in making that decision. Each time a settlement is done on an account, the credit score should improve because the late payment will then show as a zero balance on the credit report. That’s the mark that’s looked for in the long run, zero balances.
What’s more important? Getting out of debt as quickly and cheaply as possible, or preserving a credit rating?
That’s the question that everyone should be asking themselves because believe it or not, most people would rather have a great credit rating, then save themselves money.
COLLECTION CALLS AND LETTERS: Collection calls can be annoying and letters are hard to confront. Contrary to what anyone may say, the creditor has a right to call. After all, they want their money and are entitled to it. However, I explain later in the book how to stop the phone calls and potential harassment. Debt settlement companies will promise that the calls will STOP in a lot of cases. If a company promises this, BEWARE because unless a phone number is changed and the creditor doesn’t have it, then they have every right to call and will continue to do so.
BEING TAXED ON SAVING MONEY: The law states that any debt above $600, when forgiven, is subject to tax. Any money that’s saved will be treated as income and the IRS will demand that you pay taxes on it. Don’t get discouraged though, the truth is most people who choose debt settlement are considered “insolvent.” This simply means that the amount of debt owed exceeds the value of the person’s assets. For those who aren’t “insolvent” the amount paid to the IRS should be far less than the amount that would have been paid towards principal and interest. Either way, most people end up ahead, so consulting a tax accountant is the best course of action in this situation.
INTEREST AND LATE FEES: Credit card companies typically raise interest rates once an account goes delinquent. It’s called the default interest rate. It could go as high as 29.99 percent in some cases. In addition, they may charge over limit fees, late fees and any other applicable fees. The balance of a credit card could go up substantially during this time.
CONSUMERS COULD BE SUED: Anybody can be sued for any reason at any time. When going delinquent on a debt, there is always the possibility of a lawsuit. Realize only a small percentage of people get sued in relation to the amount of debt out there. Knowing how to handle a lawsuit is not difficult when the basics are known.
Doing-It-Yourself versus Hiring a Company
Debt settlement companies aren’t magicians who twist a wand and make everything better. Debt settlement is a process, whether it’s doing it yourself or hiring a company to do it. Are you ready for the biggest secret in the industry?
“How fast someone can get out of debt is directly related to how much money they can come up with.”
Pretty simple! Sounds like common sense, right? I mean, duh! You owe $50,000 and pay the bank $50,000 and then you're out of debt, right? That’s not exactly what I meant.
Debt settlement companies usually have consumers deposit a monthly amount into a savings account which begins to accumulate. Once they feel there’s enough money saved, they settle an account. This is done one by one until all the debts are settled. Some debt settlement companies will tell the consumer that so long as they pay them X dollar amount every month, they’ll be out of debt in X amount of time. Ever seen those ads?
How are they able to guess that a consumer can be debt free in 24-48 months, when they don’t even know how much debt they have?? Good question. It’s actually pretty easy.
They calculate 45-50 percent of the debt amount, add their fees and divide that by the number of months they decide on to get out of debt. Let me simplify this. Let’s take $50,000 in debt.
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$25,000 (50% of your debt amount)
+ $9,000 debt company fee
= $34,000 total amount to get out of debt
Now they ask, “How soon would you like to get out of debt Mr. Smith?” The minimum time frame is usually about two years. The below is how much would need to be deposited every month in order to get out of debt within that time frame:
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$34,000 50% of your debt amount & company fee
divided by 24 months
=$1416.66 monthly deposit
Here’s the problem with the math. The above monthly figure includes that $9,000 they quoted for their services. Obviously if a company wasn’t in the picture, it wouldn’t be in the equation. After all, that’s a lot of money! Let’s do the math if no company is involved:
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$25,000 (50% of your debt amount)
divided by 24 months
=$1041.66 monthly deposit
Wow! That’s a difference of $375 that could be saved every month. Instead, it goes to the debt settlement company. I hope this little exercise has proved that sometimes doing things on your own can be more cost effective in the long run. Now, for those who have that extra $9,000 and are okay with hiring a company, then by all means, proceed. Just keep in mind, never, NEVER hire a debt settlement company that’s asking for fees upfront.
The above calculations don’t include interest, penalties, court costs, or other fees, so these examples are only rough estimates. A debt settlement company promising the amount of time a consumer can get out of debt, without including all of these variables is virtually impossible. The best thing to do is to pay as much money as possible every month to get out of debt as fast as you can.
In 2010, the Federal Trade Commission passed a new regulation stating that debt settlement companies may no longer charge a fee before they settle or reduce a customer’s credit card or other unsecured debt, this is a federal law. Do some research before deciding on a company and make sure that the company isn’t charging fees upfront.
I hope this information has helped you to make that very important decision. Now move onto Chapter 2 because that’s where I’m going to talk about how debt settlement is done including:
· When to make that first phone call to a creditor
· How much money is needed to save for each account
· Exactly what to say when speaking to the credit card company or collection agency
· How to settle each TYPE of account
Turn the page and keep on going.
