I am constantly hearing horror stories about how people looking for debt relief are being misled and given bad advice about their debt relief options. It is ridiculous that the people who need the most help get treated the worst. Some people would rather suffer in their debt than seek the help they need. This is largely due to companies that are unethical and only interested in taking your money or that they have bought into false information about these programs. We’re going to clear the air and debunk the myths about debt as well as arm you with the information you need become debt free.
Why things are the way they are?
Words like morels, ethics and honesty no longer 債務重組成功 carry the weight they once did. Human nature is such that when an opportunity arises to make a quick buck people will do anything to get their slice of the yummy greedy pie. These scam artists are smart too! They know that when people are desperate they make poor decisions. I’m not going to dive too deep into the psychology of it but you need to know what drives and motivates these people if you want to avoid them. In nature it’s the week and the young that are the easiest prey while the strong survive. The same basic concepts apply to the predators and prey of life; if you want to survive in today’s jungle you need you need to be prepared.
Knowledge is power
It’s time to attend the SCHOOL OF DEBT. First things first let’s cover the three available programs and the various names they go by.
1. Debt Settlement also referred to as Debt Negotiation or Debt Arbitration.
2. Debt Management also referred to as Consumer Credit Counseling, Credit Counseling, CCCS, Consumer Credit Counseling Service, Debt Management Plan or DMP.
3. Debt Consolidation Loan – Any loan that consolidates your debt.
As you can see there are really only a few methods or programs but numerous name variations. This can be confusing at times. Another commonly used and frequently misunderstood word is “debt consolidation”. Consolidation is not a program type. It is a word that has a very broad meaning. Technically, all three relief programs can be considered a form of consolidation in one way or another. So remove this word from your vocabulary for now. And I’ve purposely left out Bankruptcy as an option because the goal here is to avoid it.
Debt Settlement and what you need to know
Out of the three programs Debt Settlement saves you the most money but has a negative impact on your credit rating. It’s a good fit for someone who already has bad credit or cannot qualify for a less aggressive program. Keep in mind that if you have good credit now but can’t pay your bills then you’re credit scores are going to drop anyway so you may want to consider this as an option and worry about your credit rating at a later time. Also, know that you’re good credit isn’t doing anything for you right now. The whole point of having good credit is to prove your ability to payback what you borrow and borrowing more money isn’t an option if you can’t pay your bills. Anyone can enroll in a settlement program so even if you can afford to make your payments it still might be a program to consider due to the fact that it will save you a ton. You just need to determine which is more important for you having a few years of bad credit and eliminating your debt or continue paying the minimum payment for the next 26 years wasting thousands in interest.
If you’re the type of person that strongly believes in paying back every penny that you owe I think that’s great and I completely respect your opinion. Personally I see nothing wrong with paying less than you owe to your creditors because they’re the biggest crooks out there. I could write a novel justifying why I believe this but that is another topic for another time. If you want to get a feel for how crooked the banks are then rent “Maxed Out” the documentary. I think everyone should watch it whether in debt or not. When enrolled in a settlement program you stop making payments to your creditors and start making payments into a trust account. The funds that accumulate in this account are then used as leverage to negotiate your balances down with your creditors. You can typically expect to see a savings of 50% of the original balance. You need to know that your creditors are not paid until a settlement is actually accepted. That can take months even years and it really depends on what you can afford to pay towards the program each month. The more you pay the faster the funds accumulate and the faster you get out. Settlement gets a lot of undeserved bad press.
Just the other day I was watching “Your Money” on CNN and some guy was ranting about how creditors are not obligated to settle for less than what you owe. This is misleading because your debt gets passed onto a collections company who then settles for a lesser amount. The banks are regulated by the federal government to clear bad debt from their books when it reaches 120 days delinquent. That bad debt is then traded on the secondary market just like stocks. Collection companies buy these bad debts in large pools for as little as 15 cents on the dollar. Being in collections actually works to your advantage because they’ve bought your debts for far less than your original balance enabling them to accept a smaller amount while still making money. I have never once seen or heard of a credit card where the balance could not be reduced through a settlement. Typically you can include any unsecured debt into the program with the exception of student loans, payday advance loans, military credit cards and personal loans from American General, Beneficial and City Bank. Do not enroll in a settlement program if you owe less than $7,000 because once you factor in the cost of the program and any charges incurred there’s no benefit.
10 reasons why you should use a debt settlement company
This is for the people that think they can negotiate their debt without the help of a debt settlement company. I hear this all the time and the fact is you’re going to save more money, time and effort if you use the services of a good debt settlement company. Some people get all worked up about this and I don’t get it at all. Never assume you know something…get the facts. Trust me on this one…you’ll thank me later.
- Debt settlement companies have proven strategies and tactics that enable them to negotiate to lower amounts than you would be able to on your own.
- Your creditors are not going to settle with you until you have a nice chunk of money to offer them. Debt settlement programs give you a way to save that money by making payments into a trust account. This is great for people that are not good at saving there own money. Not to mention the fact that you’re less likely to spend money you don’t have access to.
- The Attorneys that work for you when in a debt settlement program send your creditors legal notifications requesting that all communications are to now be directed through the law firm. This greatly reduces the harassing creditor phone calls.
- If a creditor takes you to court you will have proof that you are actively working to repay the debt. It looks a lot better to the judge when you show him proof of the program.
- Creditors are less likely to take you to court because they look like bullies when you’re actively working to pay them back.
- A debt settlement company is going to constantly be making offers to your creditor starting very low and slightly increasing the amount as you build funds in your trust account assuring that you get the lowest settlement possible.
- You will save yourself countless hours of work.
- You have a legal paper trail if things are inaccurately reporting on your credit report after you settle. Good luck getting it changed without it.
- Good debt settlement companies have established relationship with the banks and can get to the decision makers that have the ability to actually do something. They don’t just call the customer service number on the back of the card (probably a call center in India).
- You will save more money!
How to choose the right debt settlement company: I suggest a settlement company that uses a law firm and not an arbitrator when dealing with your creditors. They typically have a higher success and satisfaction rating. A good question to ask is who does the actual negotiating? Try to find a company that does not outsource the negotiation process to some 3rd party company. When shopping for the best company you want to look at the total benefit to you. Don’t just look at what they charge you but also consider their ability to negotiate your debt to a lower amount because it does you no good to use the cheapest company (fee wise) if they stink at the negotiation process or if they outsource it (losing all quality control). For instance, if a particular company is able to save you let’s say an additional 7% due to good negotiating but there fees are higher than the competition by say 3%. It would still be in your best interest to use them due to the total savings realized once the program is done.
Around 15% of your total debt is what you should expect to pay for a good debt settlement company. This should be included in your monthly payment and there should be NO upfront fees. Also, don’t pay much attention to what these companies estimate your total savings to be because it’s just that, an estimate and no one knows what your creditors are going to settle for until they actually settle! Always watch out for the slick talking sales associates that don’t have your best interests at heart. Make sure that the company you work with is a member of either T.A.S.C. or the U.S.O.B.A. which are both groups that help make sure that state and federal guidelines are being followed. And forget the BBB (better business bureau) because just about every company in the debt relief industry has an F rating because of the nature of the business. However, I would use the BBB to check the complaint history of a debt settlement company and the law firm they use. Personally I think the number one thing to look for is a quality sales representative that knows what they’re talking about and one that you feel you have built a solid relationship with. A bad Representative can make any company seem bad and vice versa. I like to see a company that has a sharp website which shows me that they are investing in their future and are not just a fly by night company. I would suggest going with a company that has more than just a settlement program as an option. This tells me that they’re less likely to be biased towards any one particular program.
Tax Implications and Debt Settlement
Debt settlement has become a popular approach to resolving problem debts without having to file bankruptcy. With this approach, creditors agree to accept a portion of what you owe (usually around 50% or less) to settle the account, and the remaining balance is forgiven. This technique will certainly continue to grow in popularity now that the new bankruptcy law makes it tougher to fully discharge debts in a Chapter 7 bankruptcy.
As with anything, there is no free lunch, and creditors are required to report canceled debts to the IRS on Form 1099 (when the canceled balance is $600 or greater). Therefore, the possibility exists that you may owe taxes on the forgiven portion of the debt. For this reason, many financial writers and debt counselors are strongly critical of debt settlement, to the point where they actually recommend against it just because you might end up owing taxes. But the tax consequences of settling your debts are greatly over-emphasized and this is really just a minor issue at best.
First, even if you end up owing taxes on the canceled balances, that’s because you saved a bunch of money off your original debts. The total of what you paid the creditor, plus the taxes, will still be much less than what you owed to begin with. There is still a net savings. So it’s hard to understand why this is viewed as a problem in the first place!
Second, the great majority of people who settle their debts are not required to pay taxes on the forgiven part of the balance. That’s because of the “insolvency” rule, described in IRS Publication 908, “Bankruptcy Tax Guide” Don’t let the title fool you. You don’t need to have filed a formal declaration of bankruptcy to take advantage of the insolvency rule.
Basically, “insolvent” means that you have a negative net worth – that is, you “owe” more than you “own.” As a consequence, most debtors do not have a tax liability on the canceled debts, simply because most debtors are insolvent! It usually comes down to home equity. If you have enough equity in a home (or other property) to outweigh the total of your liabilities (debts), then you have a positive net worth, and will likely have to pay taxes on the forgiven debt amounts. However, the majorities of people in serious debt trouble have a negative net worth, and are therefore insolvent. The way it works is that you can offset the canceled debt up to the amount by which you were insolvent at the time you did the settlement.
Come tax time, be sure to get professional tax advice specific to your situation. Also, be sure to read the section in IRS Publication 908 on “reduction of tax attributes,” which requires people using the insolvency rule to reduce their basis in such things as rental property, loss carryovers, etc. Most of that probably won’t apply to you, but again, get specific advice before winging it.
So, the message is, relax about paying taxes on canceled debt balances. That should be the least of your concerns if you’re upside down financially. Don’t let the misguided criticisms of financial writers (who haven’t done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt-freedom.
Debt Management and what you need to know
Debt management, by standard financial definition, involves a 3rd party that assists a debtor with the repayment of his or her debt. Debt Management Plans also known as DMP’s are designed to help people with heavy debt and high interest rates and get their financial situation under control. A simpler definition of a DMP is a structured repayment plan set up by a designated third party as a result of personal initiation.
A debt management plan entails a series of steps, which the third party service works on with the help of the debtor. The initial step typically involves compiling a list of all creditors including the amounts owed to each of them. Some creditors aren’t eligible to be included in a debt management plan, and typically, secured debt such as car loans and home loans are not included. Once a list of creditors is compiled and the amount of debt is totaled, the debtor’s total income and expenditures, such as mortgage or rent payments, car payments, cost of living expenses, and so forth, are totaled as well. The third party agency assisting with the debt management plan then helps the debtor to determine the maximum amount of money available to allocate to the plan for debt repayment. In many cases, a third party service will attempt to settle some debt amounts and exclude or lower any interest charged during the repayment period. If you have less than 3,000 US dollars (USD) of debt, you may not qualify for a third party (DMP) service.
Consider the following when looking into a debt management plan (DMP)
- You’ll need a minimum of $3,000 of debt (and not currently in collections). There must be enough debt to make the program beneficial for you. You can add old utility bills if your current debt is over $3,000, but the benefits to you is none, the debt management company will simply be acting as the paying agent.
- Accounts in collections for 30-60 days may be included in the DMP but there is no guaranty that it will be accepted. However the DMP 3rd party will attempt to get proposals accepted but again there is no guaranty due to the collection status of the account.
- Accounts included will be closed by your creditors and if you have multiple accounts with a creditor the other accounts will be closed.
- Accounts that have been in collections for more that 60 days have an even lower chance of being accepted
- All accounts need to have been open for a minimum, of 6-9 months if they’re to be included. If you would like to include an account that is younger you can but the proposal will not be sent out to the creditor until the account has matured.
- Typically your interest rates should be above 14-17% and you should be making the minimum payments. This is considered to be a hardship program so if you’re making more than the minimum payments the less likely you are going to be approved.
- Once you have enrolled it is recommended that you not pursue any new financing for 12-24 months.
- A debt management plan is not a loan.
Debt Management and your credit
A creditor does have the right to report that you are in a DMP. This does not affect your actual credit score however when attempting to obtain new financing this can sometimes be a disqualifying factor. Typically banks want to see you out of a DMP before they lend you money. This mostly applies to larger loans such as financing obtained for the purpose of a refinance or the purchase of a new home. If you make your payments as designated through the program then your credit scores will most likely improve. DMP’s are a a good fit for people that have very high interest rates, don’t need a significant reduction of their monthly payments and don’t want to hurt their credit.
Debt Consolidation Loans
Consolidation loans are just that, they are loans that consolidate your debt. Just be sure to use the same approach when looking for one of these loans and shop around for the best rate. You may have heard that the more your credit gets pulled the worse your credit gets. This is only true if you are doing it on a regular basis and for different types of loans. The credit bureaus know what type of financing company has looked at your credit report and they expect you to shop around. You should be safe if you apply to a few companies as long as you do it all within 20 days or less. This rest is self explanatory.
The debt reduction wrap up
Now, there are plenty of reliable debt relief companies out there and the debt relief services they offer work very well when applied to the correct situation. Problems begin to arise when trying to sort out the good companies from the bad ones. Every company you deal with is going to give you a reason on why the program they offer is right for you. Your best bet is to do as much research as you can on your own and find out which plan is best for you. Knowledge is power and a few hours of research now will save you a lot of time and money down the road. Let face it, no one knows your situation better than you. If you have questions about any of this be sure to seek the advice of a trusted professional in the industry.