Debt settlement programs eliminate debt by persuading the creditor to accept less than the total amount due. This process only works with unsecured creditors, such as credit cards, medical debt, etc. It does not work with secured creditors, such as mortgage lenders and vehicle loans. It is also known as debt workout, debt negotiation, and debt arbitration.
The process is generally the same no matter what it is called. You begin by signing a contract with the settlement agency, which usually states that you were not advised to stop paying your unsecured debt. Then, you stop paying your unsecured debt. Instead, you make monthly payments to a savings account belonging to you or to the settlement agency. When the balance in the account approaches an amount necessary to settle a particular debt, the agency contacts the creditor and negotiates a settlement agreement. The creditor is paid and the process starts again for the next creditor. This process continues for 12-48 months until all participating debts are settled.
Probably not. At The Ford Law Firm, we rarely recommend a standard debt settlement plan, because we can usually offer other solutions with better results. When you compare various solutions for eliminating debt, you find settlement is rarely the best choice for the normal, average consumer:
You owe MassiveBank Mastercard $10,000. You contact Big Debt Settlement, Inc (BDSI) and talk to a “counselor”, not a licensed attorney. Still, the sales pitch is appealing and they have no upfront fees, so you retain BDSI.
MassiveBank must believe accepting a reduced amount is the best they can do, or they won’t settle. To look convincing, you immediately stop paying MassiveBank. However, that isn’t enough. MassiveBank has access to your credit report. If they see you’re continuing to pay your other creditors, they won’t think settlement is their best option. So, to settle with MassiveBank, you stop paying all your credit cards. Ultimately, unpaid accounts are closed.
After you miss a payment, MassiveBank adds on late fees, penalties, and higher interest rates. Their collectors begin calling and mailing letters. BDSI said they could make those calls stop, and maybe they do for a few weeks. But, the collectors want money and aren’t deterred for long. They start calling you again. Although MassiveBank could sue you and obtain a judgment for the entire debt, let’s ignore than possibility for this example.
After saving $500 each month for 18 months you’re ready to settle the MassiveBank debt. With 18 months of no payments the balance has grown to $13,000. Still, MassiveBank is willing to settle for 60% of the original $10,000 balance, or $6,000. So, BDSI settles the debt for 46% of the $13,000 now due.
That sounds great until you realize you also paid BDSI fees totaling at least 15% of the total debt. And, you’ll pay income taxes on the 54% of the debt you didn’t pay.
So, you started with a $10,000 debt. You paid a $6,000 settlement to MassiveBank, $1,500 in fees to BDSI, and $1,750 in taxes to the IRS (if you’re in the 25% bracket).
You paid $9,250 to settle a $10,000 debt. The MassiveBank account is closed and reported to the credit bureaus as “settled for less than the balance due”. That can make it very difficult to get new credit. That’s okay, because you kept another credit card with no balance. But, that zero-balance credit card noticed the dramatic drop in your credit score, and either closed your account or dropped the credit limit and raised the interest rate.
Do you see how this might not be your best option?
At The Ford Law Firm, we do debt settlement differently than most. Our modified debt settlement program is primarily for