Dude Meets Debt Wall

Settlement with creditors is a great way to deal with debt when you are unable to maintain consistent payments. It is however, not a cake walk, though many in my industry will sell it as such.

This post was inspired by a consult I did this morning with a gentleman in Pennsylvania looking at settlement as an approach to dealing with his unmanageable debt. He wondered onto our website while searching out his options, after having already consulted with another company in the industry.

His unsecured debt totaled $22,000, spread out over 7 accounts. His minimum payments are just over $900.00 a month. His interest rates on most of the accounts are over 20%. That is what’s killing him. He would be able to meet minimums, but for the higher interest, and likely be very successful using an aggressive debt rollup, or debt snowball strategy, to get out of debt quickly and unscathed. His plight, when outlined to creditors, has thus far resulted in “Dude meets wall”.

The company he consulted with prior to me outlined a 36 month program where he could pay into an account roughly 300.00 for 36 months and poof, his debt is gone. Never mind that $3300 of that money set aside over that time will go to the settlement companies fees, I’ll get to that in a moment. The sales person with whom he consulted is selling rainbows and unicorns for a commission. The 36 month plan for his situation is ridiculous for some of the following reasons.

Two of the accounts we discussed have balances of about $1000.00 and another one for $1500.00. Enrolling these accounts in a plan like this, unless they are the first ones settled (even then not advisable, unless left with no choice) is futile and silly. The math doesn’t work. Optimum balance reduction through settlement only happens when you are delinquent, often very delinquent (5 months or more). When you stop paying, default interest rates of 29-32% will be applied, late payments will be assessed, all of which could result, in some cases, in over limit fees being tacked on. Depending on when settlement is reached the amount of the debt could now be double. Can the debt be settled? Absolutely, but using 50% savings as an example, what did you actually save? Nothing, or close enough to nothing to prove that the math doesn’t work.

What if we take these 3 smaller accounts out of the equation? We are now working on $18,000. By aggressively saving and setting aside every penny, this family could be out of debt in less than 12 months and limit to near nonexistent, the risk of being sued on unpaid debt.

Now, I was completely upfront with this consumer about the way I saw his situation and perhaps he appreciates the candor and becomes a member. Perhaps the other consult he had sounded more appealing, with its 36 months, low (too low) payment to his savings for settlement and easier sounding approach. He will pay the typical fee in this industry, which by their very nature is harmful to the settlement process. The sales person will make his commission (some cases I have seen, commissions are in excess of 70% of client fee) for selling rainbows and unicorns.

He may ultimately be out of debt in 36 months, but it will have been a very long 36 months, and he will have paid too much, experienced too much grief, may be sued on one or more accounts and may miss out on strategies that could have been beneficial to recover his credit standing much faster (this is whole different topic for another post).

Moral to this post: Don’t buy into rainbows and unicorns unless you are into paying a salesman’s bills when you can’t afford your own. The settlement industries frontline is, for the most part, populated by sales people motivated by commissions. Rarely do you find a place where you can consult with, and talk to an experienced debt specialist on first contact, prior to forking over any fees and whose motivation is your success, not your money.

If you have hit the debt wall and want to learn about all of your debt management options, including debt settlement, visit Consumer Recovery Network. While you’re there, learn about becoming a member of Consumer Recovery Network (CRN), with no risk to you, and find out if you should pursue debt negotiation.

By: Michael Bovee
CRN President

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Can Settling your Debts make it Easier to Find a Good Job in Today’s Tough Job Market?

In a recent blog post written by Diane Stafford with the Kansas City Star entitled: Bankruptcy filing thwarts re-employment, Stafford highlights a key reason why consumers who can qualify for a Chapter 7 liquidation of debt bankruptcy should research ways to avoid it, if at all possible.

One of the primary benefits of filing for Chapter 7 bankruptcy is that your unsecured debt, like credit card debt, gets discharged or wiped out, which gives you the financial fresh start you need if you are strapped with too much debt. However, as Stafford points out, not only will your bankruptcy be part of the public record and noted in your credit report for 10 years, but in today’s job market having that information in your credit file can make it much more difficult to find a well-paying job. That’s because there is a lot more competition for good jobs and so many employers are using other criteria besides an applicant’s resume and references to help them decide who is the “best” person for the position they want to fill. In many instances, one of those criteria is whether an applicant has filed for bankruptcy. The theory is that if an applicant can’t manage her own money, then she probably has bad judgment and would not make a good employee. Of course, as Stafford points out, this attitude does not take into account why an applicant filed for bankruptcy. For example, the applicant may have an ex-spouse who is not paying her the child support she is legally entitled to or the applicant’s health insurer is refusing to pay many of the medical bills associated with his wife’s serious illness.

Therefore, professionals who have been downsized or are concerned that they may lose their jobs should recognize how easy it is to hit the debt wall when they are out of work and should take aggressive steps to address their debt. Although filing for bankruptcy is an option to consider, they should also consider other alternatives, like debt negotiation. Debt negotiation has proven to be an effective option for credit relief and can prevent a bankruptcy from appearing on your credit report.

Debt negotiation involves contacting your creditors, such as the banks that issued you credit cards, to try to reach a compromise with them regarding how much money you’ll have to pay to pay off your accounts. Your goal during your negotiations is to get each of your creditors to agree to take less than the outstanding balance that you owe and for the amounts that that they agree to accept to be amounts you can afford. These negotiations are typically predicated on your having missed several consecutive payments on your accounts and on your ability to establish that a hardship — like a job loss — has made it impossible for you to pay your outstanding balances.

Until recently, large creditors, especially banks that issue credit cards, have had long-standing policies regarding when they will offer a settlement to a consumer and when they will consider a settlement that a consumer offers to them. Now however, given the current state of our economy, the troubles within the banking sector, the financial industry’s new focus on risk aversion, and increases in account charge off percentages, many banks have not only become more willing to settle credit card debts, but they are also willing to settle for less money than they would have agreed to in the past. This is good news for debt stressed consumers.

In her blog, Stafford mentions the plight of one professional who might have been able to avoid bankruptcy if he had pursued debt settlement after he lost his job. She writes: “I heard from a professional who lost his job in a March 2008 downsizing at Sprint and began a so-far fruitless job search. His severance ran out, he and his wife depleted three 401(k) savings accounts and used up other savings. They pinched all the pennies they could and are trying to keep their home through a Fannie Mae Loan Modification program.”

The plight of that individual sounds very similar to stories I hear all too often. After losing a job, or experiencing a cut in pay, consumers are optimistic that things will work out for them and so while they are looking for work, they use up their savings and draw down the money in their 401(k)s so they can pay their living expenses and their debts. However, once their money runs out and they are still jobless, many of these consumers end up in bankruptcy. Although I am not criticizing the optimism of these consumers — they need it to help them get through the tough times ahead — I am suggesting that many of them might have made better use of the money in their savings and retirement accounts by using it to settle with their creditors. That way they could have avoided bankruptcy and possibly made it easier to find new well-paying jobs.

Although there always has been and always will be consumers who will benefit more from a Chapter 7 than from negotiating their debts, the fact is that many debt-stressed consumers who do file were actually excellent candidates for debt settlement.

If you have hit the debt wall and want to learn about all of your debt management options, including debt settlement, visit Consumer Recovery Network. While you’re there, become a member of Consumer Recovery Network (CRN), with no risk to you, and find out if you should pursue debt negotiation.

Bank Practices Used to Limit Risk is Instead Creating Losses

More than half of all of the consumers that have consulted with Consumer Recovery Network, an ethical, consumer-friendly debt settlement firm, over the past two years have indicated that credit card rate increases had made it harder for them to keep up with their monthly account payments. Why are these increases happening? In many cases it’s because of something called the universal default, a provision that’s in most credit card agreements.

The universal default clause gives banks the right to increase your credit card rates for virtually any reason. I refer to the practice as rate jacking. Whatever you call it, the practice is bad news for consumers. You can be rate jacked even if you were never late making a payment on the credit card with the increased rate!! Basically, the universal default clause gives banks free rein to increase the interest rate you must pay on your outstanding credit card balances for just about any reason.

Here’s how rate jacking works: After conducting a periodic review of your credit history, the creditor decides that you are too close to your credit limit on some of your credit accounts, notices that you were late making a payment on one of those accounts, or discovers that you recently opened one or more new accounts. As a result, it raises the rate on your current balance and on any new purchases you may make with your credit card. If your finances are already shaky, having that rate increased may be all it takes to push you over the edge, especially if your other card issuers follow suit once they see that you’ve already been rate jacked.

If you are about to be rate jacked, the creditor will send you a notice telling you that your interest rate is going up. When you receive the notice, write the card issuer to clearly state that you do not agree to the change in terms and that you will not be using your card anymore. If you don’t and you use the card after the effective date of the rate increase, you’ll have implied to the card issuer that you agree to the new terms of credit.

You should also call the customer service number on the back of the card to cancel the account. A couple months later, order copies of your credit reports to confirm that they show that the account was cancelled and to make sure that each of the reports show that you did the canceling, not the card issuer. (Note: Although your credit score will take a hit when you cancel an account, the damage won’t be as bad as if the card issuer does the canceling.) If there are any automatic debits scheduled for the account you are going to close transfer them to a different account.

In our current economy, we can expect creditors to become more risk averse. It makes sense that they would begin practicing restraint again. However, arbitrarily charging consumers additional interest on their credit card balances, especially considering that not very long ago banks were encouraging those very same consumers to use their credit cards for everything and making it easy for them to get cash advances from their accounts, is tantamount to theft. Furthermore, in many instances it does the very thing that banks want to avoid — causes consumers to default on their accounts! But for now, rate jacking is legal. However in February 2010, when the Credit Card Accountability Responsibility and Disclosure Act of 2009 goes into effect, rate jacking will, for seemingly arbitrary reasons, become illegal. Until then however we can expect to hear a lot more about it. Recently for example, Citibank announced that it had rate jacked 15 million of its account holders.

If you’ve been rate jacked and have hit the debt wall, or if you are simply struggling to keep up with your credit card debts, explore your options, including setting up a debt management plan with a reputable nonprofit credit counseling agency, settling your debts or filing for bankruptcy. For information on these options and help deciding which one is best for you, go to Consumer Recovery Network.

Authored by: Michael Bovee
CRN Pres. & Specialist