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Home > Ask The Get Out of Debt Experts > Freedom Debt Relief Said Debt Settlement is Looking Like a Good Option for Us. – DeDe

Freedom Debt Relief Said Debt Settlement is Looking Like a Good Option for Us. – DeDe

“Dear Steve,

My husband and I have nearley 100k in unsecured credit card debt. Our creditors are AMEX (55k), Chase, Capital One, Barclays Bank, JCPenney, and Bank of America. We alos owe the IRS about 10K. Due to the troubled economy, I recently lost my job and cannot seem to find another one. Due to the recent credit card law changes, our creditors have reduced our limits, increased our minimum pmts, and raised our interest rates as high as 29.99%.

I am also a full time student with about 6 mos to complete my Bachelor in Business degree. I am funding my education with government student loans. My husband has about 100k in student loan debt with a total monthly pmt of $652.

We have our two teenage sons in private schools and our tuiton pmts are about $531 for 9 mos out of the year.

Although my husband makes $120k annually, we are having trouble making ends meet since I have lost my job. Even when I was working we were only able to make the minimum credit card pmts. Also, our tax preparer said that my working was putting us in a higher tax bracket so any perceived income I was making was actually costing us in the long run.

We consulted a banruptcy attorney and he said we have too much debt to file a Chapter 13 and too much income and debt to file a Chapter 7. He referred us to a corporate attorney to look into a business bankruptcy Chapter 11. He said they are more expensive, more complex, and not always approved by the creditors.

We contacted Money Management International for a Debt Management Plan and they said we have too much debt and too little income for them to set up a plan. We have a budget shortfall of about 2k per month.

So…we are considering debt settlement. Can this work? Fredom Debt says they can pull our credit file, send it through their underwriting dept, and then they tell us which of our creditors they can settle with. After reading your forum, I specifically asked them about AMEX and they said that they were quite confident that they could get them to settle for at least as little as 50% of the balance owed. They want us to stop paying on our credit cards immediately and put the money we ordinarily pay into a savings account to be used for negotiation later. Meanwhile we go delinquent. They said the creditors will not negotiate with us as long as we are current. They said we must let the accounts go past due so the creditors will be willing to settle with us.

We do not have any assets (savings, home, etc.). We lease our house and have two average vehicles that we more on than they are worth. Other than household furnishings, we really don’t own anything. Even our 401k has been leveraged to help us get out of debt.

What can/should we do to get out of debt? Debt settlement is looking like a pretty good option. Is it too good to be true? Are there other debt settlement companies that work out a plan with the creditors that does not include having you go 90+ days past due?

DeDe”

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The Answer

Dear DeDe,

Something smells really bad here. I think you should read the new FTC publication “Settling Your Debts.”

I realize that the debt settlement plan you were sold sounds too good to be true, BECAUSE IT IS!!!!

In your case you have $100,000 of unsecured debt. With the typical fee charged by debt settlement companies of 15% of enrolled debt you will pay about $15,000 in fees before you even get to settling much of the debt.

The moment you go behind you will wind up in collections and your credit will be shot for seven years. You will get collection calls and may get sued and have your wages garnished. Trying to save up enough money each month while you are $2,000 a month negative will be impossible. So that will leave you in big trouble.

Money Management International was right to tell you a debt management plan would not work in your situation. But based on what you just told me the debt settlement sales person is shoveling you a load of crap.

Go see a second bankruptcy attorney and get a second opinion.

Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $360,475 and secured debts are less than $1,081,400. – Source

If you head down this debt settlement path you will be in for a world of hurt and many years of misery.

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

Big Hug!

Freedom Debt Relief Said Debt Settlement is Looking Like a Good Option for Us.   DeDe
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://DamonDay.com Damon Day

    Hello Jesse,

    I want to apologize ahead of time if my comments come across as a little aggressive and antagonistic. This is not personal, as I do not know you, your background, or your current occupation. My focus is to educate consumers. I am just a little tired of debt settlement sales people trying to justify their front loaded, consumer rip off fee structures. As you are not only defending it, but claiming it is the only viable option, you have regrettably stepped into something that you were not likely expecting or prepared for, and for that I am sorry.

    Don’t take this the wrong way, but do you actually believe this stuff that you are shoveling, or are you just being a good soldier and toeing the TASC party line?

    -Tasc recomends charging fees over the first half of the program
    -15% of debt upfront is a normal and reasonable fee
    -anyone that charges less must be a scam
    -it is impossible to help consumers without charging all the fees upfront

    I mean, come on Jesse, I certainly will give you some style points for trying here, but this is just the typical debt settlement sales person talking points to convince consumers that even though it stinks, it is the only thing left to eat. Did these come from your sales manual or the training video?

    Do you really believe that it is impossible to have a viable business model unless you charge all your fees before performing the service? Are you aware that there are hundreds of thousands of service businesses in the US that operate on a model that does not charge all of their fees before completing the service?

    Are you aware that debt settlement companies do not operate in a “parallel business universe” that somehow differs from the free market forces that all of these other businesses operate in?

    Are you aware that there are a handful of Debt Settlement companies that do operate in a way that is much more beneficial to consumers than the model that you are espousing?

    Perhaps what you meant to say is that, you personally do not understand how to run a viable business without charging all of your customers up front first. That is certainly ok, but I find it in poor taste that you would come on to a public forum and announce that your “professional opinion” is that it is impossible, when there is no shortage of examples showing that it is not only possible, but can be very successful.

    Take Alex for instance. He is the co founder of New Era Debt Solutions. They have been around a long time and have a good reputation with very few complaints. They charge a majority of their fees when they settle their clients debts. Were you not aware that New Era existed? Or any of the other programs that are out there successfully doing what you professionally claim is impossible?

    Jesse, the specific problem I have is that I feel you are misleading consumers by promoting your upfront fee model as the only viable option, and claiming that anything else must be a likely scam. That is simply Naiveté at best or dishonesty at worst.

    Now, I want you to consider something before you respond to me.

    If you come back and try to somehow justify that a front loaded fee model is somehow beneficial to consumers, or the only viable option for them, I will not hesitate to open up a big public can of whoop ass, all over your talking points and expose in detail why what you are saying is total BS.

    From what I have read from you so far, I do not get the impression that you are some new sales rep, drunk on the company cool aid. I suspect you know exactly what you are doing, and as a professional courtesy, I am telling you upfront, that this is not a public debate that you want to have. However, I suspect you already know that.

    That being said, if you would like to stick your toe in this pond, I want you to answer one simple question for me. You advocate a “TASC Approved” (What a Joke) fee schedule of charging 15% of a clients debt over 18 months of a 36 month program.

    Please tell me where the money comes from to support your client in month 19 through 36 so they can receive this “top notch customer service” you speak of? After all, you claim nobody works for free right?

    I am very anxious to get your answer to this question. You said that it is your “professional opinion” that it is impossible to run a business without consistent revenue. How consistent can the revenue be if the consumer is expecting services for the last 18 months but doesn’t have to pay any money for them at that time? Aren’t you advocating something that you claim is impossible to do?
    .-= Damon Day´s last blog ..President of New Era Debt Solutions Attacks Me, It’s Just Par for the Course =-.

  • http://www.neweradebt.com Alex

    Hi Steve,
    I did want to chime in to the comments that Jesse made about performance based models. I see that one can deliberate on what is DeDe’s best choice and truthful an honest conversation with DeDe is needed to learn about her tolerance for any of the options. You both make extremely valuable points about DeDe but it depends on her outlook of things, that is why an honest consultation is needed.

    As for Jesse’s comments on performance based models. Well Performance Based models ARE the ORIGINAL model the industry was built on, since the late 90’s the model that existed was based on performance and for any of us who have been Consumer Advocates and yet provide a viable solution for clients that is the best option for clients.

    I do absolutely agree with Jesse, it is a more costly model which is why MOST companies today are flat fee models for the purpose of cash flow. However if you have a solidly built business, then that model provides the BEST solution for the properly qualified client. The success rate is certainly HIGHER for the performance based model.

    I would even add the fact that Debt Settlement is Not a secret and it is truly based on Banking Laws and how the banks process the delinquent files, knowing the process and utilizing the opportunities for the clients best interest should mean that a consumer should be able to settle a good portion of debt within the first 6 months which will encourage them to follow through the process.

    I believe many companies do not take advantage of this opportunity on the clients behalf, since they are so focused on collecting THEIR fees.
    Debt Settlement if done right, can be a tremendous tool and if the fees are consumer friendly, then the consumer will have a much better chance than in Credit Counseling or a Chapter 13.

    With only a handful of companies that are performance based you will see that they have all been around for a very long time- Some of us for over a decade! Must be doing something right.

    DeDe, please do your due diligence and even look up the “14 questions to ask any debt settlement company”. You will be glad you did. Steve and Jesse, thank you for the post.

    Alex

  • http://Website Jesse

    Steve,

    Thanks for the reply – As I mentioned, her situation may be largely attributable to over extending herself, improper budgeting, increased student loan payments, and her recent loss of employment (which was likely unavoidable). I think it’s safe to say that MOST consumers would like to avoid a bankruptcy filing, and typically student loans can be deferred up to a period of 36 Months or longer.

    As for a performance-model Debt Settlement Company? Seriously? How could a reputable company operating in this manner provide her with the highest level of service, if she chose Debt Settlement? If she is properly educated for success using Debt Settlement, then she will understand it takes months (at least 6 (in most cases), and sometimes up to a year or longer) for the following things to happen:

    1. For her to raise the appropriate funds for the company to begin negotiations on her account(s).

    2. For her accounts to charge-off, reaching the hands of a 3rd party mediator (i.e. Collections, Debt-Buyer, Law Firm et al.); it which point the original lenders almost ALWAYS have pre-set settlement parameters that a knowledgeable Debt Settlement Company should be able to go well beyond when negotiating her debts (typically 40-50% is acceptable, especially in today’s economy, often times MUCH lower).

    Please explain to me how a performance model can legitimately staff for customer service, a negotiations department, as well as sales/ debt consultants to explain the program and assist in enrollment? In my professional opinion, it is impossible to run a business with generating a consistent revenue stream, unless its a one-man show with no over-head; but even then, that company would need to pay for advertising to generate a solid lead base – Not to mention that cancellation rates can vary from 5-50% (depending on circumstances)… I just don’t see how it is possible – NOBODY WORKS FOR FREE!!!, and I have found no data to support the following:

    1. That there is a performance based model company that has PROVEN to be reputable, compliant, and/or successful, and from my understanding, the very small percentage of companies that operate in this fashion actually charge higher fees based on the final Settlement Amount(s) etc.

    2. That if there was such a company, that their model is inherently BETTER (or for that matter, more affordable) than a traditional debt settlement approach.

    In summation, although 15% flat rate may seem high, there are companies out there that match or beat their competitors which may bring down the cost. Also, these fees should be paid out over no less than half of the program term (18 Months on a 36 Month Program per TASC recommended guidelines), and besides that, the traditional approach (including fees), on a monthly basis, tends to be about 1/3rd of clients monthly payments before they fell behind in the first place.

    This should allow for them to free up positive cash flow, and plan/ budget for a standard 36 Month plan in most cases. I will agree that Debt Settlement is NOT for everyone and the industry as a whole has taken much flack in recent years, but there simply needs to be more viable options for struggling consumers out there. There is substantial data and research to show not only that Debt Settlement works, but that the success rate is BETTER than Credit Counseling and/or Debt Management Programs http://www.creditsolutions.com/# (September 2009)— The program itself is a hardship program for those looking to avoid a potential bankruptcy filing.

    In the end you get what you pay for – If you want top notch customer service, a knowledgeable and certified sales and negotiations staff, and to work with a reputable, licensed, bonded, experienced, and accredited company in this industry, you have to pay for that service, and when its all said and done, a 15% Service Fee accounts for only a marginal profit for most companies out there; otherwise consumers are rolling the dice, crossing their fingers and looking for a QUICK and EASY fix… but there en lies the problem; it simply doesn’t exist. If she thinks a company that essentially works for FREE is the answer to her problems, she will likely end up paying MORE in the end, causing herself more problems.

    When it comes to things that are TOO GOOD TO BE TRUE, I have no faith in a so-called performance based debt settlement model… Sounds like a SHAM to me, but that just my opinion.

    Best Regards,

    Jesse Pendergras

    There needs to be more appropriate regulation, better education on these matters, and CLEAR terms of enrollment outlined for any consumer considering this option

    • http://GetOutOfDebt.org Steve Rhode

      Jesse,

      Sorry for the delay in responding. Somehow your comment wound up labeled as spam.

      While you seem to be wed to the up-front fee approach instead of a performance based fee approach it’s just not how the regulators and legislators see it. The pending rules are exceptionally clear. I’ve seen them. Unless they change before they are passed the debt settlement industry better get prepared for a maximum up-front charge of $200 or less, little or no monthly ongoing fees and only a pay on settlement performance model because that is what is coming.

      Steve

  • Jesse

    Come on Steve, the REAL problem here is that DeDe has simply over-extended herself… It is likely that she can not continue making those payments with high APR’s, especially w/ credit reform laws going into effect 2/2010 (which means she may likely default soon regardless as her minimum payments increase), and why wouldn’t AMEX settle for at least 50% of the original debt? What are they going to do? She has no assets to lien, and currently no wages to garnish – Due to her financial hardship, they have nothing to do but get in line like everyone else. The one thing I AGREE with in your answer is for DeDe to get a 2nd opinion on a Chapter 13 Bankruptcy Filing as she will likely find that due to her families income, she will be required to pay back a significant portion (up to the full balance decided by the courts) of her debts for a period of 3-5 years (which may be more per month that a Debt Settlement Program), plus deal with the harsh reality/ future consequences of filing – Personally speaking, if a consumer is NOT eligible for a Chapter 7, I would most certainly recommend a Settlement Program, when the worst case scenario would be bankruptcy anyway… The problem then is identifying an honest and reputable company in that industry… They are FEW and FAR between, but they DO exist. I DISAGREE with the company telling her to stop paying her accounts immediately (which is not only against TASC recommended guidelines, it borders on torturous interference w. her lenders) — She should take her time and do her research!!!!!
    - Her credit score will go down.
    - Collection activity will continue.
    - There is risk of litigation.
    - They can not guarantee the “specific” results of the program.
    - If she can afford more than her minimum’s due, she has a moral and ethical (as well as a legal) obligation to PAY HER BILLS.
    - A Settlement Program is a Hardship Program and should be taken seriously.

    In summation, based on her story; and the fact that she is not eligible for Debt Management & is looking to AVOID a potential bankruptcy filing, then Debt Settlement could certainly work for her — And she is at LESS risk of litigation (in her situation) because she has no assets and is currently not working – Also, in MOST cases, escalation of these matters can be avoided – Most banks/ lenders are also struggling in this economy and would much rather come to terms with a settlement, than to pay for increased legal costs to litigate; especially if it could push their client into a bankruptcy situation (Whereas the creditor may get nothing).

    DEBT SETTLEMENT IS A VIABLE OPTION FOR CONSUMERS JUST LIKE DEDE, ALTHOUGH I CAN NOT VOUCH FOR THE PARTICULAR COMPANY SHE IS DEALING WITH. ALL CONSUMERS IN THIS SITUATION SHOULD DO PLENTY OF RESEARCH, TALK TO SEVERAL COMPANIES, AND MAKE A WELL INFORMED DECISION KNOWING ALL BENEFITS AND RISKS INVOLVED IN THIS TYPE OF PROGRAM.

    In summation, Steve… You can not tell me that filing bankruptcy in this matter is THE answer (at least not the ONLY answer). The consequences of a DS Program are FAR less severe, and in most cases, much MORE affordable than a bankruptcy filing.

    However, if she signs up with a scrupulous company that doesn’t follow proper disclosure and doesn’t follow through on their service agreement, she could get BURNED. Hopefully increased regulation on a national scale in this industry will weed out these types of organizations helping more consumers make the right choice.

    Thank you,

    Jesse Pendergras

    • http://GetOutOfDebt.org Steve Rhode

      Jesse,

      Thanks for taking the time to post your comment. I always appreciate readers having multiple points of view from which to learn from and digest.

      She actually did not say she wanted to AVOID bankruptcy. She said she had sought the advice of a bankruptcy attorney and had run into some obstacles.

      For me her situation boils down to the large amount of student loan they have now and once she graduates, the fact she is currently not working and probably will not be till she finishes school, the stress the debt places on her till graduation, the impact on the family, the up-front debt settlement fees they can’t afford, and the poor success rate in general in the debt settlement industry.

      With only a hand full of debt settlement companies that charge on a performance based model instead of front loaded fees based on the amount of debt enrolled I find it difficult to suggest she pursue a solution that will cost here $15,000 in fees with the typical debt settlement approach.

      Is bankruptcy the only answer? No. other solutions might include winning the lottery, getting an inheritance, fleeing the country, etc. My suggestion was based on my experience and the reality of her situation from a holistic point of view.

      If DeDe wanted to find one of the few debt settlement companies that charged on a performance based model and no up-front front loaded fees, she was mentally prepared to deal with falling behind, getting collection calls, threats of legal action, potential legal action, years to resolve this, seven years of bad credit, etc. then debt settlement might be right up her alley. It’s just not what I thought was best for her in her situation and she came to me for my opinion.

      But what I did leave out is if she wanted to get a second opinion about debt settlement she should talk to Damon Day, a guy that will meet with her over the phone, review her situation, and after an in-depth review, give her his recommendation. He is familiar with some of the few performance based debt settlement companies and who knows, suggest one to her. Damon happens to do phone consults, I don’t anymore.

      Steve

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