by Dr. Whit Woodard, CFIC and CEO of The ECHO Group

Bankruptcy is often presented as the best solution to a perplexing debt problem. But is it really? Bankruptcies are increasing at an alarming rate. Legislators, responding to the difficulties of both borrower and creditor, are re-examining the ramifications of our current laws. Expect some important and needed changes in bankruptcy law very soon. Debt ridden families are often led to believe that it is a relatively harmless procedure that will eventually go away, not realizing that it leaves behind a legal record that will continue to haunt them long after it drops from their credit report.

But there may be a better and more honorable solution – debt settlement. Settlement offers the prospect of paying unsecured debt for pennies on the dollar and when coupled with a total debt elimination program can even offer a faster route to credit restoration than the more widely known debt management programs. Let’s take a look at the more common remedy.

Most of us are familiar with debt management. An example of this approach is Consumer Credit Counseling Service (CCCS), a pioneer in the field. Debt management companies attempt to lower credit card payments and interest, but you pay 100 cents on the dollar. Logic would insist that lower payments on the same balance will take longer and cost more; and the consumer’s credit report is adversely affected for a longer period of time. The participant in these programs should be aware that so called non-profit debt management firms receive income from the credit card companies, calling into question where their loyalties lie. Debt management has been helpful to some people whose debt problems are not very critical, but those with more severe difficulties are usually turned away.

Debt settlement (also called debt negotiation, debt mediation or debt resolution) is a much more aggressive approach, but helpful to those who have month left at the end of their money. If there is a good reason why the debtor is unable to pay unsecured debt, the amount can be negotiated and, therefore, resolved in much less time than in a debt management program. As each account is settled, that portion of the credit report is changed. Another important benefit is that the settlement company deals with the creditors for the client. Once the notifications have been made, the borrower no longer needs to endure the harassing phone calls. Debtors pay what they can afford on a monthly basis and the settlement company holds the funds in trust until each account can be paid through negotiation. While no guarantees can be made, most debts will be resolved for only pennies on the dollar. Since the amount of debt is reduced, the credit standing of the participant is restored much faster. The debts are settled and bankruptcy is avoided by employing a more honorable approach.

There are concerns of which the debt settlement participant should be aware. No one can promise that any creditor can be prevented from pursuing any remedy afforded by law. That means that creditors may take measures to secure a judgment or garnish wages. It is a somewhat rare occurrence in a debt mediation program, however, and a reliable debt settlement company can assist you in dealing with those proceedings if they occur. Third party creditors such as collection agencies have considerably less clout according to provisions of the Fair Debt Collection Practices Act of 1977.

Beware of companies that promise to help without knowledge of your specific debts and circumstances, including a detailed accounting of your monthly expenses. Be sure that they provide you with regular reports on the status of your accounts. You should be able to call one person who will always be familiar with your program. Anyone who guarantees the settlement amount in advance is probably lying to you. Look for a company that will be honest with you when bankruptcy is the only reliable option. Otherwise, you may pay the significant up front fees only to pursue bankruptcy in the end. Typically, up front costs for settlement companies are pretty similar, around $300 to $400 with varying monthly service charges similar to the fees for debt management services. The big difference lies in the settlement fee when each debt is settled. It will range from 10% to 30% of the amount of debt that is excused. Avoid programs with settlement fees over 15%.

Trustworthy debt resolution companies should have a well structured educational program to deal with the causes and effects of debt and teach you how to utilize a cash economy. It will be of little long term value if you settle your immediate problem only to take it up again with continued use of credit cards, refinancing, consolidation and other remedies that are designed to hold you in debt bondage. Credit utilized is debt and debt is detrimental. Ask about the educational assistance, if any, that is offered by the settlement company.

Many companies that advertise “debt management,” “debt settlement,” and “debt elimination,” are simply disguised lenders who will encourage their clients to borrow again to deal with their money problems. The rationale usually leads them to refinance real property to pay unsecured debt using lures such as lower payments and interest. There may be some attraction for twice baked potatoes in a fancy restaurant, but twice borrowed money is just more expensive. If you have a problem paying your bills, the last thing you want to do is secure your unsecured debt. That approach takes options away from you and you will end up with more debt than you had before and should your situation worsen, you are in danger of losing your home. The lure of a lower interest rate seems attractive, but lower interest for a longer period of time equals more total interest. Lower payments mean that you will pay longer and ultimately pay more. It is just plain bad advice. Better to use that extra money to pay the debt through a settlement program if it is warranted. Borrowing money to pay debt is a little like chewing tobacco to avoid the nicotine in cigarettes.

Debt settlement isn’t for everyone, but it is a better option than either more borrowing or bankruptcy when there are serious debt problems due to circumstances that have taken away the ability to pay the bills. It’s an option that is very often overlooked on the way to bankruptcy court or the exacerbation of debt through consolidation.

---

Dr. Whit Woodard, President and CEO of The ECHO Group is a nationally recognized facilitator of debt elimination workshops. A Certified Financial Independence Consultant in Rocklin, CA. He teaches “Living In The Black (Transforming Debt Into Wealth)”® workshops at several community colleges and adult education venues and consults on debt elimination solutions.