The concept of settling debts has probably been around since man first began lending. In the United States the earliest instances of this strategy seem to be attributed to a man by the name of William Samuel Johnson. Johnson was a scholar, lawyer-jurist, politician, and one of the most educated signers of the United States Constitution. Working as a creditors’ attorney, Johnson often negotiated a settlement of accounts rather than engaging in lengthy litigation (which is all debt settlement really is).
Debt settlement is a strategy that involves negotiating a reduction in the balance you owe, rather than just interest rates. A legitimate debt settlement company can usually arrange for your unsecured debt — typically, credit card debt — to be paid off for anywhere from 30 to 50 percent of the balance owed.
It is intended to provide those people who are unable to make their minimum payments an ethical way of repaying as much of their debt as they can, in accordance with their means.
When you hire a debt settlement company, they notify your creditors that you have enrolled in their program and that your intention is to settle your accounts. They also notify them that since they represent you, all creditor contact should be with the settlement company.
All your monthly payments are then consolidated into one regular monthly deposit into a settlement account. The money in the account continues to accrue until you have an amount sufficient to settle with a creditor.
For example, if you owe $1,000 on a credit card, a debt negotiation firm may arrange for you to pay off the debt with a lesser amount, say $400. Once the $400 has accrued in the account, the settlement is finalized and you pay the creditor the agreed amount. That debt is now paid with a $0 balance and the process is repeated until all creditors have been paid.
The strategy is designed to get you out of debt as quickly as possible. Most people can retire all their unsecured debts in as little as 18 to 36 months.
The Reality
This program only works on unsecured debt. It does not work on loans with collateral, such as mortgages or car loans. However if you qualify, it’s one of the most straightforward and highly effective solutions for retiring debts and avoiding bankruptcy.
To qualify a person must be behind on their payments (or can see that they soon will be). Creditors will not negotiate if you are current – there is no incentive for them to do so. They only negotiate after the account is delinquent.
This delinquent status can have a negative impact on your credit report. Your creditor will report you as being late. However, if you are behind on payments already, the impact on your credit has already occurred.
Essentially, debt settlement is really nothing more than a negotiated compromise with your creditors. It's actually a win-win scenario for you and the creditor. The result is a much faster path out of debt.
It's also a much more flexible approach than other types of programs, because it's the only approach that allows for adjustments up or down in the monthly funding commitment. That's especially important for consumers with unstable finances. 3 biggest drawbacks - You could get sued, ruin your credit, or have to pay taxes.
Conclusion:
It should be viewed as an alternative to bankruptcy. In fact, it's a very good alternative to Chapter 13 bankruptcy in particular. When viewed as an alternative to bankruptcy rather than a cure-all for financial woes, it provides a good solution. For a detailed comparison between debt settlement and Chapter 13 bankruptcy, see new-bankruptcy-law-info.com
Debt settlement can provide a more aggressive approach to debt reduction that makes sense for many consumers.
Recommendations:
Be careful if you decide to work with a debt settlement company. Several companies have been known to encourage you to utilize this approach even though you may not qualify. The idea of being debt free for only half of what you owe can be a tempting proposition. However, anyone who preys on that temptation will likely fail to fully disclose potential drawbacks such as possible taxation and damage to your credit. Whenever a portion of your debt is “forgiven” by the bank, the forgiven portion could be reported to the IRS as taxable income. This rarely applies to those who truly qualify for the program, but can serve as a hefty penalty for those who attempt to abuse the system. Be sure to discuss this topic with your consultant before pursuing this strategy.
Here are Several Advantages of Working with D.W. Scott Financial
- We will go over an in-depth financial budget and set you up on an affordable monthly payment plan to start saving money for settlements.
- We handle all possible creditor calls and put a stop to the majority of them.
- Our negotiators understand the threshold of each creditor and how low they will go. Our interest is in our client and we work for our clients, not the creditor. Our goal is to get you the lowest settlement, period.
- We have a firm understanding of the intricate workings of all of the creditors and collection agencies out there. If legal action is taken against one of our clients, we know exactly which ones are empty threats and which ones are not.
- Our services include a financial education program to put you on the fast track to a great credit rating and a prosperous financial future.
We also recommend that you familiarize yourself with all of your options before making a decision about what course of action is right for you. Please review the other options available to you and their benefits and downfalls.
The Debt Relief Industry
What are the other options Available to You?
The Minimum Payment Strategy
Concept:
This strategy allows you to pay a small monthly payment each month, usually only 2.5% of the entire balance. This means that you can use credit to buy something you could not otherwise afford, and all you have to do is make a small monthly payment that is only a fraction of the balance.
For example you can buy a brand new $2,000 television for only $50 a month. This allows you to buy the goods and services you want today, and pay for them over time. If you can afford $400 per month in monthly payments, you could buy $16,000 worth of goods or services you would otherwise have to wait to acquire. It allows you to live a lifestyle above what you could otherwise afford.
Reality:
This is the strategy every lender wants you to adopt. Remember, your creditors are in the money business. They don’t make money from the loan itself, they make money from the interest you pay. The more interest you pay, the more they make. Let’s look at how much interest you will pay:
That $2,000 television could take over 39 years to pay off and you would pay over $8,400 in interest alone! By the time you finally paid it off, you would have paid over $10,400 for a television that you probably got rid of close to thirty years ago. Is it any wonder that creditors encourage this strategy? They made over $8,400 profit on the loan and they could care less whether the television still works. They lent you money, what you spent it on was up to you.
What if you had charged the full $16,000 that we talked about earlier? By the time it was paid off, with minimum payments you could have paid over $73,494 in interest alone. That means you would have paid a total of $89,494 for $16,000 worth of stuff. But wait, it gets even worse. You had to earn that $89,494 after taxes, so you could make the minimum payments. That means, if you only pay 20% in taxes, you would have to earn $111,867 to have enough left over to pay $89,494 to your creditors. Let that sink in for a moment!
You might have to make over $100.000 in hard earned cash, just to pay for $16,000 worth of things you bought using minimum payments.
Conclusion:
This strategy isn’t just weak, it will destroy you financially. Ultimately it’s a trap! The minimum payment strategy provides the illusion that you can live a lifestyle above what you could otherwise afford. That’s only true for a little while. As you continue to buy things, using the minimum payment strategy, the balances will grow and the minimums will increase.
Eventually the minimum payments will grow to a point where that is all you can afford. When that happens all of your money is going to pay the minimums and you can’t afford to buy anything else. Now you are caught up in the vicious cycle of using all your current income to pay for things you bought in the past. At that point you will be forced to live a lifestyle below what you could actually afford, and probably far below.
Ask yourself a simple question…If you had no credit payments, if everything you have now was paid for, would your lifestyle be better or worse?
Recommendations:
If you are using this strategy, find a better one now! Don’t wait, because this one will suck you into a life of financially slavery. If you are already caught in this trap you need to keep reading and find a workable solution.
The Power Payment Strategy
Concept:
This is the minimum payment strategy on steroids. It is based on the same concept that martial artists use to break boards and bricks and perform other amazing physical feats. It focuses all your resources on eliminating one debt at a time. By focusing your resources that way, you are able to eliminate the first debt and then refocus all your resources on the second in line and so on. As each debt is eliminated you use the money you had been paying on that debt towards the next one. You continue this until all the cards are paid off.
This is also referred to as the “snow ball” method or the “avalanche” method. Think of it like a snow ball rolling down hill. As it moves along it gains tremendous speed and force. The additional money added to your payment is often referred to as your multiplier or accelerator.
Reality:
This is a strategy that works well for someone who is able to make their regular payments. A knowledgeable financial consultant can even structure this strategy to work for someone who can only afford to pay their minimums, but be careful. There are a lot of people who hope you never learn about this strategy and will try to misdirect you. This includes your lenders as well as traditional “debt relief” companies. The “debt relief” companies, like credit counseling and debt settlement, want you to enroll in their programs and will go to great lengths to convince you to do so. Your lenders hate this strategy because they lose a ton of money in interest. Let’s apply this strategy to the previous example of $16,000 worth of debt: Without paying a single penny more than you pay now you could be debt free in as little as 5 to 7 years and would save over $60,000 in interest. If you could add a small percentage to your payments you would be debt free faster and save even more. The key to making this strategy work is to strategically select which accounts to focus on first. Any competent financial advisor should be able to help you structure this program, but as I mentioned before…be careful! There are a few well intentioned individuals advocating this strategy who fail to consider the impact of variable interest rates (especially on credit cards). Credit cards don’t charge just one interest rate on your entire balance. There is usually a separate rate for purchases, balance transfers, and advances.
Conclusion:
This is truly a strategy that your lenders hope you never discover. If you are able to make your minimum payments now you could probably utilize this strategy. Most people who are not falling behind, or are struggling to just make their minimums, can find enough money in their budget to make this strategy work. With the right guidance, most people can find money they didn’t even know they were spending that can be used to accelerate this strategy. That means they could probably be debt free in as little as 3 years with no adverse affect on their credit rating. In fact, this strategy usually enhances a persons score.
Another advantage to this strategy is that it works with any types of debts including your home, cars, student loans etc. Most people could be completely debt free, including their home, in less than 10 years.
Recommendations:
Look at your current expenses and see if there are areas you could cut to increase your payments. If you use this strategy, it is usually recommended you focus on the higher interest rate first, but that may not be the best approach. For many people it is better to focus on the lowest balances first. That way you see success sooner by paying a card off and seeing success is key to maintaining your motivation. As mentioned before, it is important to maintain your motivation and focus during this plan. Enrolling in financial education and money management courses, etc. is also a good idea.
The Debt Consolidation Strategy
Concept:
You consolidate all of your debts into one debt, so that you have one monthly payment instead of several. Hopefully that loan is at a lower interest rate or longer term so your payment is reduced.
Here is an example – you find a lender who is willing to loan you $16,000 to pay off your credit cards. Because you have some equity in your home and a decent credit score you get a 30 year 2nd mortgage at an 8.9% fixed rate. Your new payment would only be about $150 per month versus the $400 you were paying on the credit card minimum payment. That means a monthly savings of $250 per month.
Reality:
Although the payment is lower than the current payment on the credit cards, you would end up paying just about the same as if you used the power payment strategy. The difference is you would be in debt 4 times as long. That means that you probably will fall into the same trap over 75% of the people who try this strategy fall into – RELOADING.
You can’t borrow your way out of debt. This is debt manipulation not debt elimination, unfortunately it provides the feeling that you have paid somebody off. In fact you just moved the debt from one place to another FOR A FEE. All you really did was change the name of your creditor and paid a fee to do it. That fee is often included in the new loan so in reality you are now deeper in debt.
In addition you have taken unsecured debt and made it secured. As a result now you might lose your home if you have trouble paying.
Conclusion:
For most people this is just an illusion that makes them think they have done something about their debt. It can be a dangerous trap that provides the illusion of debt relief. In reality most people find themselves right back in credit card debt within 2 years of consolidating, only this time they have the 2nd mortgage also. You really are accomplishing nothing more than what you could do with the power payment strategy in ¼ of the time.
Recommendation:
Why deceive yourself, risk foreclosure due to reloading, and prolong your agony? Avoid it unless you have a specific plan to accelerate the payoff of this loan to minimize your risk and exposure.
The only time this strategy makes sense is when it is blended with another strategy. Consult with a qualified financial consultant (not a mortgage lender or loan officer who receives a commission from the loan) before you follow this path.
The Credit Counseling Strategy
Concept:
As credit card use became more prevalent in the 60’s and 70’s so did defaults. As more and more people used credit cards, more and more people started experiencing difficulty in making their payments. The number of bankruptcy filings began to increase and credit providers were losing revenues. Credit counseling was started by the organizations that performed collection activity for credit card companies to help recover that lost revenue. The concept was simple, create a nonprofit organization to provide financial counseling to those customers who were having difficulty making their payments. The organization could negotiate a reduction in the clients’ interest rates, consolidate their payments into one lower payment, and teach them to manage their finances better through proper budgeting, etc. This type of repayment process is called a “debt management” plan. In order to support the organizations efforts, the credit card companies would provide financial support in the form of “fair share” contributions. That meant that the creditors would give the organization a contribution equal to 8% to 15% of what the client paid through the counseling program.
It’s designed to be a win-win-win relationship. The creditors get their money, the client avoids bankruptcy and gets out of debt in 5 to 7 years, and the organization provides a valuable service to the community.
Reality:
While there are many good people, with a genuine desire to help, who work as credit counselors, the truth is simple. Many of these organizations have all but abandoned the financial counseling and focus primarily on the repayment or “debt management” plan. Because of this, many companies have had their non profit status revoked. These agencies still receive compensation from creditors as “fair share” contributions. Some even charge an additional monthly fee from the client as a “voluntary contribution”. Some people look at credit counseling as a disguised form of collections because the organizations are really paid by the creditors based on how much they get a client to pay. This could certainly be considered a conflict of interest. Who is the organization working for, the client or the creditor?
It’s also important to keep in mind that while a debt management plan is intended to help you avoid bankruptcy, your creditors are being paid through a third party. Any time your creditors receive payment through this type of plan it may be noted on your credit report as “paid through counseling.” Many lenders view the use of such a plan the same as filing a Chapter 13 Bankruptcy.
Conclusion:
You decide – are they a benevolent non-profit or wolf in sheep’s clothing. This is a weak strategy for most people. Most anything a credit counselor can do, you can do for yourself, without the derogatory comments showing on your credit report. You can negotiate lower interest rates yourself. You can administer the fixed payment strategy on your own (which is really all you are doing in a debt management plan).
Recommendations:
Generally, the monthly payments on a debt management plan are about the same as your current minimum payments. If you can afford these payments you are usually better off executing a Fixed Payment or Power Payment strategy on your own. This is one case where “self help” may be best.
The Bankruptcy Strategy
Concept:
Personal bankruptcy generally is considered the debt option of last resort because the results are long-lasting and far reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don’t have to repay certain debts. There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court.
Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts. Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors.
Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary by state.
Reality:
Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.
Effective October 2005, Congress made sweeping changes to the bankruptcy laws. The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7.
Another major change to the bankruptcy laws involves certain hurdles that a consumer must clear before even filing for bankruptcy, no matter what the chapter. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount.
Conclusion:
Bankruptcy information (both the date of your filing and the later date of discharge) may stay on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into financial difficulty and can’t satisfy their debts.
Recommendations:
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has changed many of the qualifications for filing. To learn more about the means test requirements visit the U.S. Trustee Program at www.usdoj.gov/ust.
Summary
Aside from winning the lottery, or inheriting money from a rich relative, there are 6 common strategies for eliminating your debt:
1. Minimum Payments
2. Power payments
3. Debt Consolidation
4. Credit Counseling (aka Debt Management Plan)
5. Debt Settlement
6. Bankruptcy
As we previously discussed:
Minimum Payments are like cutting your hand off with a bamboo saw – it will take forever and the pain can be unbearable.
Debt Consolidation is not a debt elimination strategy at all, but rather a cleverly designed form of debt manipulation, sold by lenders, to provide the illusion of doing something while convincing you to pay additional interest.
Credit Counseling is nothing more than a disguised collection strategy administered for a fee, which is money you could apply to pay down the debt.
This means there are only 3 strategies that truly make sense:
Power Payments – for those who can afford to pay their current minimum payments, or even an additional amount towards principle.
Debt Settlement – for those who are unable to make minimums without using more Credit.
Bankruptcy – for those who can’t afford to repay even a portion of their debt. This is often regarded as the last option.
The cold hard truth is this – the only way to pay off your debts is to repay the principle or have it forgiven.
Solutions
Our Solution
RESPONSIBLE SOLUTIONS™
We offer more than one solution. We understand that when it comes to “debt relief” there is no such thing as one size fits all. Unlike a debt settlement or credit counseling company we offer a wide array of products and solutions. We don’t try to force a square peg into a round hole but instead we design a plan that is tailored to fit our clients’ unique financial situation.
Typical debt relief companies are forced to make the client fit their program. With our Responsible Solutions™ program we develop a plan designed to fit the clients’ individual goals and values. We offer programs that many debt relief companies don’t even know about or certainly won’t tell someone if they do.
The Responsible Solutions™ program gives us the unique ability to blend programs to meet individual situations. This ability allows us to focus on what’s best for the client instead of forcing clients into programs they may not even need in order to meet sales quotas and satisfy management. It also allows us to create comprehensive programs to eliminate ALL of our clients’ debts, not just unsecured debts.
Our clients are our first and only priority. We understand that their credit rating is important for more than just obtaining loans. It can impact their insurance rates, job opportunities, etc. Our Responsible Solutions™ program allows us to design every program with a “credit consciousness” in order to minimize or eliminate negative effects. Some of our programs will actually enhance and improve their score.
Typical debt relief programs like credit counseling and debt settlement both have a negative impact on credit scores. With our programs, even if the client requires our Debt Reduction Program that might reduce their score, we offer solutions to repair and rebuild any negative effect.
TRUE PICTURE CASH-FLOW ANALYSES™
We tailor a solution to our clients’ situation based on their financial reality, not what any of us wish, think or believe it to be. The True Picture Cash Flow Analysis™ allows our clients to gather and enter their personal financial information in the privacy of their own home - without having to talk to anyone wanting to sell them something they may not need. Perhaps the best part is that no one will see this information but them, and they can discover the answers to their money problems without disclosing their personal financial information to anyone.
The problem with “debt relief” companies is that they only provide a cursory budget review (often just to satisfy management). They overlook the “hidden expenses” that don’t readily come to mind but can add up to significant amounts. They then use those “flawed” numbers as the basis of their program. It’s the old “garbage in, garbage out” problem. Since the program is flawed from the beginning it seldom works and that’s why as many as 75% of their clients drop out.
The True Picture Cash Flow Analysis™ allows us to get an accurate picture of their financial situation. The numbers we build their plan on are solid and real since the plan is built on a solid foundation it works.
D2P EMPOWERMENT PLAN™
Unlike debt relief companies, we know that enrolling in a program is only the first step to becoming and staying debt free. We understand the first step is important, (“no one ever completed a program they never started”). However, we also understand that simply enrolling in a program, by itself, will not get the client to their destination. There are many people who have enrolled in a debt settlement or credit counseling program but never completed it. The few who do often find themselves right back in the same situation within just a few years.
We recognize that the age old adage is true:
“Give a man a fish and you have fed him for a day, Teach a man to fish and you have fed him for a lifetime.”
Our D2P Empowerment Plan™ is designed to do more than just give fish (solve the current debt problem). It’s designed to teach on how to fish (empower our clients how to solve and avoid financial problems for a lifetime).
Through the D2P Empowerment Plan™ we provide ongoing education and support to ensure our clients achieve their goal of becoming debt free. The D2P Plan goes on to help clients learn how to avoid future problems, so they stay debt free and are able to build true financial security.
Call your D.W. Scott Financial representative to get started
(866)-240-6885