Debt Settlement Program
Debt settlement programs abound. But how do you know what kind of debt settlement program is right for you? There are literally thousands of so-called debt relief companies that have sprung up all over the country in the last few years. Some of these companies are operated by attorneys schooled in bankruptcy while others are debt management, credit counseling or debt settlement program companies. Each may call themselves a debt settlement company but they will tend to specialize in one product or service and most have a limited geographic area of service.
Choosing the right program for you requires an understanding of the various kinds of services available. This article is geared towards giving you a thorough understanding of the various services available.
Many bankruptcy lawyers have come up with debt settlement services. This is because many people in economic need may opt for bankruptcy in lieu of traditional credit counseling or debt settlement programs. This is not to say that bankruptcy attorneys that operate debt settlement or debt negotiation firms are not to be trusted. However, you should ask if the debt settlement company provides more bankruptcy services than debt settlement services. This is a good indication of whether or not their clientele is “funneled” in to one or another type of service.
Debt Management firms offer consumers the ability to mange a client’s finances for them. According to the Federal Trade Commission, “In a DMP, you deposit money each month with a credit counseling organization. The organization uses these deposits to pay your credit card bills, student loans, medical bills, or other unsecured debts according to a payment schedule they’ve worked out with you and your creditors. Creditors may agree to lower interest rates or waive certain fees if you are repaying through a DMP.” The FTC provides a great deal of important tips on their website to avoid fraud as some debt management companies can take your money and run. Tips to avoid fraud include background research and acquiring testimonials.
Consumer Credit Counseling Services, often referred to as CCC’s, provide a consumer’s with a comprehensive income and expense analysis, give the consumer a monthly budget plan based on their income and expenses and may engage in negotiating with creditors to make payments at reduced interest rates. CCC’s do not typically reduce the principal balance of a consumer’s debt significantly, there are credit implications as the consumer’s credit profile show’s they are in CCC’s and there is still interest to be paid.
Debt settlement programs offer the consumer the ability to both drastically cut principal balances and eliminate interest while paying off most unsecured debts in a specific timeframe. There are credit implications like CCC’s as the consumer’s credit profile indicates that the debt was negotiated for less than the original balance. However, the main upshot is that principal balances are often cut to 50% of the original balance, there is typically no interest paid and consumers get out of debt between 12-48 months.
Whatever program you think is best for you always do your homework.
Debt Relief
Since the beginning of the economic downturn there has been an enormous amount of emphasis on debt relief programs. Most of these programs can be lumped in to one of three different things: (1) credit counseling; (2) debt management; and (3) debt settlement programs. Many financial advisors have come to the fore offering their advice on the benefits and deficits of each.
Take Suze Orman for example. She has a video on YouTube that has seen over 55,000 views. The title of the video is Debt Settlement a Scam? In it, Ms. Orman describes debt settlement programs in the worst possible light indicating that people can do everything a debt settlement company can on their own. Well, while this may be the case, many people do not want to deal with their creditors. They have been treated less than human by their creditors and simply want someone to take care of the problem. This is why many attorneys provide debt settlement services: to stop creditors from harassing their clients and legally reduce their client’s debt. This is a service, not a scam.
Ms. Orman further claims that you will typically pay a large up front fee. This is not necessarily the case. Of course, I do not dispute that there are bad apples in the world that operate sham debt settlement firms, but that is why decent business people advise consumers to research the company’s they are interested in doing business with. Of course a service comes with a price, that is why it is a service. Nothing comes for free. There are fees associated with having someone else perform debt settlement for you but this is a convenience fee and many people want this convenience.
So, what exactly is Suze Orman really peddling except for fear? I suggest you check out her website if you want the answer. She sells a ton of different books, cd’s, personal development kits and other do it yourself financial information. If you ask me her high profile and negative commentary about debt settlement programs is designed to do only one thing: to make consumers feel the only legitimate way to get their finances in shape is to buy her books, tapes, cd’s or go to one of her seminars.
I have no problem with people selling financial information or financial services. What I find questionable, however, are people that use fear to make a sale. It seems to me like Ms. Orman, and many other sellers of informational products, make their millions selling information based on fear appeals that make them rich while doing very little for the consumer. Of course, the consumer will have obtained a great deal of sound financial advice, but is Ms. Orman helping you settle your debts? No…she just charges for her advice in electronic form. My suggestion is this: if you really want to obtain a wealth of financial information and guidance you can do so from your public library without spending hundreds, if not thousands of dollars, on personal financial development gurus.
Debt settlement programs are not for everyone. They do have a negative impact on your credit. Not as bad as bankruptcy but it does hurt. However, most people will not enter a debt settlement program unless they are already behind on their payments. Finding a debt settlement company is relatively easy. If you want to perform due diligence on the company look to the Better Business Bureau. If the debt settlement firm you are working with is attorney based then you can easily check your state’s bar association to see if they are in good standing. You can also perform research on the attorney general’s website in your state to determine if legal action has been taken against a company you are considering. For even faster results, just type in the name of the company you are thinking of using in to the Google search bar followed by the word “scam”. Disgruntled consumers will often use the word scam in posts about bad experiences with companies of all sorts.
Debt Mangement is another option that gets a ton of negative press even though the Federal Trade Commission has a lot of positive things to say about it. There are two types of negative press found about debt management: (1) specific articles about debt management companies that are scams and (2) website’s like Ms. Orman’s that use fear based appeals to try and make you buy informational products. Dave Ramsey has a website that does just this. For example, Mr. Ramsey set’s up his sales pitch with a “Myth” and a “Truth” about debt management. This “myth” according to Mr. Ramsey, is that debt management companies will “save you.” His claim to “truth” is that debt management hurts your credit. This is nothing but a straw man argument. Mr. Ramsey takes what is obvious: that if you settle your debts for less than what you owe it will have negative repercussions and makes it seem as though debt management itself is all-around a bad option. His advice instead? Buy his tapes and cd’s.
Credit Counseling is yet another option that the Federal Trade Commission has positive things to say about yet gets a ton of negative press. On the FTC Website you can read for yourself what they have to say:
“If you’re not disciplined enough to create a workable budget and stick to it, can’t work out a repayment plan with your creditors, or can’t keep track of mounting bills, consider contacting a credit counseling organization.”
Nevertheless, you will find numerous posts from self proclaimed financial experts that fail to understand some people need the help that the FTC recognizes credit counselors provide. Dave Ramsey claims the following on his website:
Credit Counseling…”is a bad idea for several reasons. For one thing, it will virtually destroy her credit with regard to buying a home. Almost every lending institution will look at using a credit counseling service as if she had filed Chapter 13 bankruptcy.”
Frankly, I find it unfitting for people to constantly rebuke the benefits of financial services they don’t offer to funnel people in to buying their product or service. This is a perfect example of someone using the worst case example of a program so as to make themselves look like the best possible option in the world.
The main point of this article is not necessarily to make debt settlement, debt management or credit counseling seem like the absolute best options for consumers in need of debt relief. Rather, the goal of this article is to show that some of the people in the financial services sector use questionable logic to lead consumers to give them their hard earned money. My advice, as always, is to shop the market, consider your options, research the companies you are looking to do business with and always ask yourself “What’s in it for them?” Then, write down the pros and cons of your options and use your best judgment.
Debt Reduction
Debt Reduction is the goal of millions of consumers in our worsening economy. It makes sense to try and reduce your outgo as much as possible when the prospect of continued employment is shaky, the mortgage and real estate market continues to stagnate and the stock market is, by any measure, unstable.
There are a great number of limitations facing consumers when they need debt relief most. For example, the credit markets, usual sources of debt reduction, are dry. There are fewer options today for debt consolidation loans as there were in the earlier part of this decade. The consolidation loans that are still available, while interest rates are still low, have much more stringent qualification guidelines. As such, the available marketplace for alt-a and subprime borrowers continues to sour. In fact, there is virtually no market for debt consolidation loans unless you have perfect credit.
So what are the available options left for the average consumer? I argue there are three options that remain, in no particular order of benefit. First, bankruptcy is an available option to many consumers. But there are significant downsides. For example, tarnished credit for a very long time, the expense of paying a qualified attorney and the emotional toll a bankruptcy has on a family. The second option is paying what you can over time. This usually results in making minimum payments to your creditors. This is a sound option for some, however, the amount of money paid back to your creditors over time is astronomical.
One of the only options available to consumers to achieve debt relief in our present economic times is debt settlement. While debt settlement does effect your credit negatively, it is not nearly as bad as a bankruptcy. Moreover, the timeline to pay off your debts is typically negotiated down to less than 48 months as opposed to the typical 20 year timeframe to pay of credit cards making minimum payments. Furthermore, in debt settlement programs, consumers do not pay interest while in repayment and their debts are often negotiated to around 50% of the consumer’s original principal balance.
Making a decision on the right direction to go when looking in to debt reduction is highly situational, that is, very dependent on the individual consumer’s needs. Look at all of your options and never make a debt reduction plan in haste, you can pay for making a bad decision for years.
