Your 5-Step Guide to Debt Settlement

It’s no secret that many Americans are struggling with their finances right now, having taken the hit on multiple fronts: rising unemployment and underemployment, weak home prices, a volatile and risky stock market, and rising costs for food and other necessities. As a result, consumers have been turning to their credit cards in droves as a source of cash to help bridge the gap between their shrinking incomes and rising expenses. Many have gotten themselves in so deep with their credit cards that they are now unable to make more than their minimum monthly payments, a situation that can literally take decades for the consumer to resolve before the debt is completely paid off. A new industry has emerged in response to the increased demand for unsecured debt solutions, and debt settlement may very well be the first choice for those who are in need of either:

• A higher level of relief than a Debt Management Program (DMP), which is typically available through a Consumer Credit Counseling Service (CCCS), or
• A better alternative to bankruptcy and its disastrous consequences for the consumer’s credit report

A good debt settlement program will accomplish both of these requirements and should be considered by those who find themselves faced with a serious unsecured debt problem. Many indebted consumers are currently on track to pay off their debt in 20 to 30 years or even longer, and a debt settlement program can typically reduce that timeframe to just 2 to 3 years. It is important for those who are considering debt settlement to have a good understanding of the program before actually moving forward with one. To that end, I’ve assembled a 5-step guide to the essentials that a consumer should know. Because just like any other debt solution, debt settlement has its own set of pluses and minuses that need to be considered and weighed against the exact circumstances and needs of their financial situation. Also, the probability of following a program all the way through to its successful conclusion is greatly increased if there are no unpleasant surprises along the way and the consumer knows beforehand what they can expect.

The first thing that the consumer needs to do is to determine whether or not debt settlement is the appropriate solution for their debt problem. While a personal consultation with a debt counselor is most likely necessary, I can provide some general guidelines here that should be helpful.

A DMP through a CCCS may be a better option than debt settlement if the consumer is:

• Still current with all their credit card payments
• Has a good credit report
• Can realistically afford to repay the total debt in full if afforded some interest rate assistance and financial counseling
• Can afford a monthly payment similar to the one they are currently making toward the debt

Bankruptcy may be the best choice if even a 40% to 60% reduction of the debt plus the elimination of interest rate charges, which are characteristic of a debt settlement program, are still insufficient to get out of debt. However you need to consider the fact that if you can’t pass the “means test” requirement for a Chapter 7 bankruptcy, you will enter a repayment program under a Chapter 13 bankruptcy in which the court will ultimately decide how much you can afford to pay.

Once you’ve decided that debt settlement is the right solution for you, you’ll need to choose a debt settlement company to work with. The debt settlement marketplace is a crowded one due to the explosion of demand for these services, however some of these companies are not reputable and instead are looking to separate you from the little money that you have left. The best advice here is to check out a company’s customer feedback from a trusted 3^rd party source like the Better Business Bureau to make sure you won’t be swimming with sharks.

When discussing your settlement program with a debt counselor, make sure that they consider your whole financial situation before recommending a payment amount and program duration. And don’t be impressed by a company that quotes you a low monthly payment until you find out all the details. A low payment, in fact, may not be in your best interests if it means that you’ll be in the program for too many months. It will end up costing you more in the end because most companies have a monthly service charge. So a program with an inappropriately low payment that’s stretches out for too long will be in their best interests, not yours. A well-structured debt settlement program should strike a proper balance between payment relief and total program cost. For most consumers this will mean a program length of between 24 and 36 months, however those with exceptionally large debt or severe hardships (or both) may require longer programs. Try to choose a company that spreads its fees over the first 12 to 18 months of the program.

After you’ve set yourself up on a debt settlement program, the next step is to commit to staying with the program until you’re completely debt-free. Enrolling in a program and then pulling out after you’ve paid a company doesn’t make any financial sense, and you can’t afford to make mistakes right now. If possible (and reasonable), make extra payments toward your program to complete it even faster than scheduled. You also need to be prepared for the possibility of annoying collection phone calls from your creditors, but the debt settlement company should be able to reduce them significantly for you. Be disciplined with your budget and if you find yourself in a moment of weakness or frustration, then remind yourself how many years you’re shaving off repaying your debt by doing the debt settlement program. It will be well worth the effort when all is said and done.

Once you’re enrolled in a debt management program, you’ll stop making any payments to your creditors. Instead you’ll be making a consolidated monthly payment to the debt settlement company that includes their fees. Your credit will suffer until your debts are paid off, however most consumers who enter debt settlement programs either already have damaged credit or anticipate credit damage anyway if they do nothing to resolve their debt. Remember that the goal here is getting rid of overwhelming debt, not adding to your debt, so your credit shouldn’t be your primary concern at this point anyway. After you’ve finished the program your credit should improve relatively quickly.

The company will accumulate funds for you in a trust account. After there is enough money in this account to settle one of your debts, and the timing is right for a good settlement agreement to be reached, the company will negotiate on your behalf with the creditor and then notify you when a good offer has been received. You must personally approve any offers and all disbursements from the trust account, after which the company will then get the offer in writing from the creditor. After they have the written offer in hand, they will release funds to the creditor. This process is repeated for each account, one at a time, until all your debt is completely paid off.

Congratulate yourself on staying the course and getting yourself completely free from your debt! You may have just saved yourself decades of payments, not to mention all the work and stress involved in coming up with the money for them during the entire repayment timeframe. Well done!

The last step in the process is to wait until at least 30 days after the end of the program and then run your credit report. Review it and make sure that all the accounts in the program have been marked as paid and are now current. If they have, then your credit score should recover quickly and you should reap the full benefits of the program. If you see any errors related to these accounts, contact the settlement company and follow up with them about the discrepancies. They likely were able to secure agreements from your creditors to report your accounts as paid in full and current after they had been paid as agreed.

Make a resolution to use your credit cards wisely and cautiously in the future to prevent the possibility of getting into trouble with them again. If possible learn to operate primarily on a cash basis, using your cards only enough to keep your oldest and highest-limit accounts active. That way you can get a home or car loan when needed, and you’ll be able to make use of them if an emergency should arise. If you honestly believe that you just won’t be able to resist the temptation to use them inappropriately, then cut them up and learn to live happily without them.

Credit Card Debt Relief