The Credit Counseling and Debt Settlement options

Part 3
The Credit Counseling and Debt Settlement options

There seems to be a widespread misconception about what a credit counselor can and cannot do for you, so let’s start by explaining what Credit Counseling is and then we’ll explain what Debt Settlement is.

Credit Counselors will not settle your debts, that is not what they do. What they can do for you is consolidate your unsecured debts and lower your interest rates, and then collect a payment from you through a debt management plan. 

Credit Counseling, when done through a reputable company, can be a great help to get out of debt. It is also known as Debt Consolidation since the idea is to consolidate all your unsecured debts into one account, and you send only one payment every month to the Credit Counseling company who in turn forwards it to your creditors. They usually charge a fee of about $35-$60 per month for their services and you can expect to be debt free within 5 years. They will negotiate a lower rate for you (about 7-9 % or so, depending on several factors) which can sometimes be a huge reduction (keep in mind that some people are paying 23% or more!). When you start the process, you will be asked to cut up your credit cards which is always a good thing to do when you are in debt (regardless of whether you do debt consolidation or not!)

You will probably not be able to get new credit until your accounts are paid off (let’s face it, who would give you credit if they see in your credit report that you haven’t been able to pay the other creditors?) but the great thing is that you know you can be debt free in a few short years.

A good credit counseling company will do what its name implies, they will teach you how to handle your finances, and many will even offer financial classes to help you understand how to manage your money properly. 

The challenge is that many credit counseling agencies may not have your best interest in mind. I know this for a fact, since I once started working for a Credit Counseling company in San Diego and had to resign on my second day when I became aware of their unethical practices. I simply would never be part of a company that takes advantage of the people it is supposed to be helping. I told the owner what I thought and resigned; it was clear to me that he was in that business just for the money (and he was making A LOT of it!). To find a legitimate credit counselor, go to the National Foundation for Credit Counseling at http://www.nfcc.org  

Debt settlement, on the other hand, is when a creditor forgives a portion of your debt if they think that they will not be able to collect the total amount. The reasoning is simple: it’s better to collect something than nothing.

Obviously not everybody will be able to settle their debts. A person may be successful settling one debt but maybe another credit card may not be willing to settle. If you can convince them with enough facts that you absolutely cannot pay the entire amount, they you have a very good chance of reaching a good settlement.

Since a credit card settlement will show up as a negative on your credit report, this option is not for you if you are paying your bills on time, have a good record and would like to keep it that way. 

Please note that debt settlement should ONLY be used as a last resource if you are considering bankruptcy; the process can sometimes be difficult and its effectiveness will depend on many factors. It’s like doing your own taxes. Yes, you can do it, but you will never know how much better would have been if it was done by a professional. Almost always it would be done much better by a professional.

 I strongly suggest that if you decide to go this route and decide to try to settle your debts, you hire a professional to do the job for you. This way you will be way ahead of the game, since a professional has been through the process many times and has the experience necessary to reach a good settlement agreement on your behalf. 

Keep in mind that collectors are people who have been trained to collect money, they do it every day for a living, so they do know what they are doing. They are used to negotiating with people, and they have been through different scenarios and situations. So the best option is to hire somebody who is used to dealing with these trained collectors and knows how to play their game.

Just be very careful since there are a lot of crooks out there it’s always better to go with a company or attorney that was referred to you by somebody who can give you good references about their services.

But if you do decide to do it yourself, here are some guidelines that will help you achieve very good results.

1-    Settling will only work if your account is seriously past due. Companies will only offer a good settlement option when they believe it’s their last chance to recover their money. When they think that if they don’t settle, they won’t recover a penny of the money you owe. Usually, the best time to start negotiating a debt settlement is about 4 or 5 months after you sent your last payment. Remember that at about 6 months or less they will probably sell your account to a collection agency, so do not wait for more than 5 months. Once the account is sold to the collection agency, you will lose most of your leverage. You can still settle, but it’s not the same, the sense of “urgency” that the credit card company had before is now lost.

2-    Most settlements are for between 30 and 70% of the amount owed. It will depend on several factors, mostly on your negotiation skills and how long it has been since you sent your last payment. You may want to offer 20%, but expect your offer to be rejected. Your goal should be to settle for about 50% of your debt, but settling for 2/3rds can be a reasonable goal. Keep in mind that people who actually settle for 10-20% are the exception to the rule; very few people accomplish this.

3-    Before you talk to them, make sure you have all the paperwork you need in front of you:
-all copies of your statements, letters from your creditors, and a dedicated notepad where you can take notes of everything you discuss during your conversation. Remember to always write down the date and time of the call, the name of the person you talked to, their number or extension if they can provide it, and everything you talked about.

4-    This is one of the most critical factors here: always, no matter what they say and how much they threaten you, ALWAYS be nice to them. Never, EVER use profane language or threats; it will only make you lose your battle. The key is to always be nice and treat them with respect. If you deviate from this even for a moment, you lose.

5-    Make sure you get all offers in writing. Whatever you talk on the phone, if you don’t get it in writing, is useless. Anytime they offer a deal you find acceptable, make sure you ask them to send it to you in writing. 

6-    Occasionally you may talk to somebody who might not be willing to negotiate, or who will treat you in a disrespectful way. In this case, you can either politely terminate the call, or ask to speak to a supervisor. But again, always be very polite and respectful, and never use profane language or threats.

7-    Ask them to remove all late fees, finance charges and over the limit fees from your account. This alone will reduce your balance substantially. Do not demand, always ask politely. “You know, I would really like to pay you all that I owe, but I simply can’t. I lost my job and have very limited income (or whatever your situation is). But if we can get the balance to be more manageable for me, I am willing to start sending you payments starting this week“.  If they see that you are sincere and willing to pay them, you have more chances that they will be willing to help you.

8-    You will be talking (mostly) to trained professionals. They go through extensive training on how to collect money and how to ask the right questions to get the information they want. So never lie to them. Just be sincere, you want to pay but you don’t have the means, but if they can help you by reducing the total balance you will be happy to pay them. This is the attitude that will help you. 

9-    Always start with a goal in mind. What would be a good amount to settle for? Say you owe $10,000 to a credit card company. A good number would be $5,000 (50%) or less, but it will depend on many factors. So if they offer you to settle for $8,000 you can politely decline, because it would “probably” be better just to file bankruptcy (again, if they feel they will lose it all because you are filing for bankruptcy, they may concede). Many times you will get a phone call or a letter a few days later offering to settle for less. 

10-    Keep in mind that they will almost always run your credit report and look at your payment history. So if you are paying all your bills on time but not to XYZ Company, then XYZ will not be willing to settle with you. After all, if you are paying everybody else, chances are you can pay them as well. But if they see in your report that you have not been paying most of your bills for over three months, or four months, then they will most likely be willing to settle with you. If they see it’s their last chance to recover their money, then you have leverage. But this is a two-edge sword as it can backfire on you if you don’t know how to negotiate properly. 

11-    There are four factors critical to the success of the debt-settlement negotiation process: Communicating effectively, Negotiating, Documenting and Following Up. When you excel in all four you will walk away with great results.

12-    When you agree to send a payment, many times the collector will ask you to pay right then, while you are on the phone. It is very important that you do not do so: make sure they send you the offer in writing FIRST; then you mail them the check. You can say something like this: “I understand you want a payment right now, but unfortunately I cannot make a payment at this time, it is just not possible. I will have $______ soon and want to settle at least one of my accounts with whoever will give me the best deal. Could you please send me an offer in writing?” The amount you mention in your conversation should be a round number representing about 30-50% of your balance, or whatever you can pay at the time. 

13-    This is worth repeating many times, because it’s critical to your success. Always be kind, nice and polite. Be sincere and never lie. Even though many collectors will not care, make sure they understand your situation. “I would love to pay you but I have been (laid off, in the hospital, with a reduced salary, got divorced, etc). I am desperate and I’m seriously considering filing for bankruptcy”. 

14-    Every time you send them anything (whether a letter or a payment) use Certified Mail with return receipt. Remember that documentation is extremely important; it is one of the four factors that will determine how successful you are.

So this is the debt settlement process. It is not hard, but most people will probably have better results if they go with a trained professional. If you do decide to do it yourself, make sure you read this chapter several times, leave nothing to chance and do your research first! Study the steps & write down what you are going to tell them.