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Debt Settlement Advice for Debt Settlement Companies and Consumers – Part 5 – Why Simultaneous

Back when I was in collections, I recognized a major vulnerability to the consumer. When the consumer was represented by a debt settlement company and settling their debts one at a time, with each settlement that was made, their negotiation power was diminished. Back then, when I would negotiate with a debt settlement company, the first thing I would do is look at the consumers credit report to review how many previous accounts they had settled. The more accounts they settled, the less negotiable I was.

The reason for this, is when you work in collections, your goal is to extract as much money as possible. When I identified that a consumer had already settled other accounts, I realized that the threat of bankruptcy was generally just a threat. Think about this logically, why would a consumer file bankruptcy or not pay their remaining accounts when they have already spent so much time and money settling what they have. They’re bought in and there is no turning back.

This is how my simultaneous idea was born. When I was in collections and debating about starting a debt settlement company, I reviewed all of the pitfalls of debt settlement and how to counteract them. The only way that I could come up with, to make the option of debt settlement reliable, was to only offer debt settlement in a simultaneous way. If a consumer could settle all of their problem debts at once, debt settlement could be offered in a fairly safe and consumer friendly manner. Consumers that settle their debts simultaneously generally obtain the funds to do so from their 401k, IRA, cash-value life insurance policy, annuities, loans from family, or by selling an asset.

There are a variety of benefits to settling simultaneously. Let’s review them…

  1. Dramatically lower your monthly obligations

    When you source the simultaneous debt settlement approach with a 401k, you will generally lower your related monthly expenses by a range of 50% – 70%. Here’s an example of a situation and outcome. The debt settlement calculations are based on our debt settlement averages that are broken down on our website.

    • $100,000 in unsecured debt
    • 15 different accounts with minimum payments totaling $3,000
    • Total of Settlements – $44,850 – (based on our 44.85% settlement average)
    • Client Saves $55,150
    • Debt Settlement Fee $8,272.50 (based on our fee of 15% of savings) the typical debt settlement fee of 20% of what you enroll would be $20,000
    • Total Expense to Client $53,122.50

    A 401k loan of $53,122.50 with a 5 year term and a 5% interest rate is $1,002.48 per month.

    In the above example, the consumer settled all of their credit card debts, and lowered their related monthly expenses by $1,997.52 or 66%. 

    Since they borrowed the funds from their 401k, it isn’t a taxable or penalized event. They also will replenish the amount that was borrowed and pay themselves back with interest.

    A consideration you should make with 401k’s is that you have 60 days to repay the loan from the time you quit or are terminated, or the loan converts to a withdrawal and it becomes a penalized and taxed event. So, if you’re on shaky ground at work, you should think worst case scenario and incorporate a 10% penalty, the federal income tax, which is dependent on your tax bracket – we generally estimate 25%, and the state income tax.

    However, some employers will allow for the continuation of the loan after job separation, so it’s worth looking into your employers policies regarding this prior to making your loan. Also, be aware that if it does become a taxable event, that it could also push you into a higher tax bracket.

    IRA’s work similarly, but you must withdrawal it and pay penalties and taxes. The penalty is generally 10% of your withdrawal, the federal tax, which is dependent on your tax bracket – I generally estimate 25%, and whatever your state income tax is.

    If you fund the settlements by selling an asset, cashing in an annuity, or by surrendering a cash-value life insurance policy, then it’s a 100% reduction in related monthly payments.

    However, there may be possible tax events involved on any earnings that were derived from these financial resources. Meaning the withdrawal of more than what you originally put in. We recommend that you seek out professional tax advice previous to committing to a simultaneous approach. Just to ensure that you’re familiar with all of the possible costs involved.

    If you borrow the funds from family it will naturally depend on the terms that you and your family agree to.

  2. The consumer has the benefit of knowing what their creditors will settle for prior to paying any settlements.

    At Debt Relief A La Carte, our strategy is to negotiate with all of your enrolled creditors at the same time. We generally don’t advise our clients to settle one account earlier than the others. We prefer our clients settle all of their enrolled accounts after they have been negotiated. The reason why is so our clients don’t end up paying a settlement and forfeiting those funds in the event that we are unsuccessful. After negotiations are complete, the worst case scenario is that there may be some account(s) that may not be low enough for you to be able to afford to settle. In this situation, we review what your monthly expenses will be if you settle the debts that you can afford to settle, and if it will solve your problem. If it does solve your problem, we give you the choice of us continuing to negotiate the remaining account(s) to obtain a lower settlement, negotiate a payment plan, or unenroll the account(s) from our service.

    Our debt settlement process creates the opportunity for the consumer to know that they’re actually solving their problem prior to spending any of their money.

  3. Lawsuits

    One of the biggest risks when you’re attempting debt settlement, the traditional way, by settling one debt at a time, over time, is the risk of lawsuits. There are a couple reasons why this risk is great. One reason, is when you don’t make payments to your creditors for long periods of time, they have the option to pursue you legally. The longer it takes you to settle your debts, the greater your risk.

    Another reason, if you hire a debt settlement company that prematurely represents you, (meaning they make contact with your creditors prior to you having the ability to settle with them), some of your creditors will become more aggressive in order to become the priority. They know that most debt settlement programs are forecasted to last 24 – 48 months. Your creditors don’t want to wait that long, they want to be paid yesterday. One of their only ways to influence you and your debt settlement company, to address their account next, is to become legally aggressive.

    When you settle your debts simultaneously, you greatly minimize your exposure to this situation. Our average time to complete our debt settlement service is 78 days. There is little reason for your creditors to become aggressive in an effort to become the priority, since all of the enrolled accounts will be negotiated simultaneously.

  4. Interest and Late Fees

    As I mentioned earlier, typical debt settlement programs are forecasted to take 24 – 48 months. If you sign up for a debt relief service when you’re current, all of the accounts that you enroll will be assessed interest (generally a much higher default interest rate), late fees, and over limit fees if applicable, until you settle the accounts or they charge off.

    After charge off and generally 30 days in recovery, the original creditor will either sell the account to a debt buyer or place the account with a collection agency or attorney. If a debt buyer purchases the account, they will also make that same decision about placing the account with a collection agency or attorney. Some of these entities will continue to assess post charge off interest to your accounts until they’re resolved. That means that there is potential for some of your accounts to be exposed to 24 – 48 months worth of interest.

    By settling simultaneously, you essentially eliminate the majority of this problem. Since, our average debt settlement client settles their debts in 78 days.

  5. Rehabilitation

    Again, typical debt settlement companies take 24 – 48 months to complete. When you are behind on your accounts, your credit will not begin to fully rehabilitate until you satisfy all of your delinquencies. On an account that isn’t yet charged off, satisfaction can be achieved just by bringing the account current. On an account that is charged off, satisfaction will not occur until you pay it off or settle it. If it takes you 24 – 48 months to resolve your debts, your credit will not begin to fully rehabilitate until you satisfy your last delinquent account.

    On average, Debt Relief A La Carte clients, will begin to rehabilitate their credit in 78 days. Previous clients of ours, have reported that they started gaining new credit within 6 – 18 months of completing our service.

Conclusion

If you’re considering debt settlement and you have the option to settle your debts simultaneously, it is your absolute best option.

  • You will dramatically lower your monthly expenses (generally lower than most proposed debt settlement program payments)
  • If you use an approach as described above, you will benefit from knowing what your end result is and if it solves your problem, before you spend any money
  • You will greatly minimize your risk to lawsuits, since you will be settling your debts quickly
  • You will greatly lower your exposure to interest, again, since you will be settling your accounts quickly
  • You will gain your credit back much sooner, again, since you will be settling your accounts quickly

See you next week for part 6 of this series.

Jared Strauss
Debt Relief A La Carte, Inc
www.avoidbk.com

Debt Settlement Advice for Debt Settlement Companies and Consumers – Part 5 – Why Simultaneous by

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  • http://www.avoidbk.com/ Jared Strauss

    You guys got me wondering, so I went back and looked to see how our clients source of funds breaks down: 

    37% from selling assets, life insurance, and annuities 

    20% from family

    7% from retirement accounts

    36% by refinancing an asset – a method that doesn’t exist in today’s lending environment 

    So, as you can see, the use of a retirement account is very situational. And clearly, if they fall into the category of paying taxes on the settlements and taxes on their retirement, it definitely doesn’t make sense.

  • Scott Johnson

    Jared

    Thank you for all the dialogue and participation – See you on your next Post – Till then
    Best of Luck Sir

    • http://www.avoidbk.com/ Jared Strauss

      Scott, my pleasure. Thank you for yours, as well. Have a good one.  

  • Scott Johnson

    Should you use your 401(k) money to pay off your debt?
    by Michael Rubin

    A 401(k) loan is risky. Should you terminate employment for any reason (e.g., lay-off, spouse gets a job in a different city, you get really irritated at your boss one day, etc.) your loan is typically due, in full, within 60 days. When you can’t pay it back (and you won’t be able to – if you could, you would have paid it back already), the entire outstanding loan is considered a distribution. As such, you’ll be subject to income taxes, plus a 10% early distribution penalty if you’re under 59 ½. This potentially large sum will be due no later than the following April 15. Will you have the money available? Unlikely, making matters even worse.

    http://blog.turbotax.intuit.com/2011/01/20/should-you-use-your-401k-money-to-pay-off-your-debt/

    • http://www.avoidbk.com/ Jared Strauss

      Sounds like the same warning I put in my post, huh? And his interpretation isn’t even factoring in a 2 – 3k difference in monthly expenses. Interesting. 

  • Scott Johnson

    I am an advocate for suitability and screening by the
    numbers, not only for Good Faith Estimates but as KPI’s as to results for a
    consumer. In no way was implying a do nothing strategy to resolve debt issues
    but taking an economic approach. As variables increase outcomes tend to deviate
    therefore measurement and monitoring of programs are essential. The debate for
    consumer to choose a program based on the limited data is compared just by time
    and cost – impact I will shelve at this point

    Program                       Time                Cost                 Impact

    DMP                           60months       $120,000        
    Chapter 7                    3months         $1,500
    Debt Settlement          36months       $51,000          
    Retirement Funded     60months       $112,458
    Chapter 13                  60months       ?

    The quick answer on rate of return I will reference the average
    return in the last 20 years in the stock market has been – 11.96%, Since 2009 -14.68%.
    Using $54,118. As mean value in lost value appears to be distant from
    overstated

    • http://www.avoidbk.com/ Jared Strauss

      In case you missed this….

      “Charles you make a great point. In the above example, the consumer has freed up approximately $2,000 a month. Scott, if they wanted to, they could replenish the loss you’re referring to in less than 3 months. Then, they would mitigate their future retirement losses and would have a budget that was approximately $2,000 less going forward. All the while, everything has been resolved, credit is rehabilitating, no more phone calls and letters, no more exposure to lawsuits, interest, and uncertainty.”

      • Scott Johnson

        The whole point was that consumer could not afford the 3k payment per month that is why they where seeking debt help so where would the 2k come from?

      • http://www.avoidbk.com/ Jared Strauss

        The 2k is the monthly difference that is saved by settling their debts all at once and funding it with the 401k. So, lets say they were a $1,000 a month underwater to begin with. That leaves them with a $1,000 a month to pay towards the retirement, so 5 months, instead of 3.   

      • Scott Johnson

        I will narrow my questions to just numbers -

        What percentage of your clients default on their 401k loan repayments ie xx.xx%

        What percentage of your clients refund their 401k in less than 6 months i.e. xx.xx%

      • http://www.avoidbk.com/ Jared Strauss

        Scott, those are great questions. My current answers to both are I have no idea. What I do know, is that I have never been notified of it occurring. I would imagine if our services ever put someone into harms way that they would have notified us. As I mentioned earlier, in over 10 years we have had zero complaints. 

        It is quite possible that some of our clients did default on their 401k loan, again, I don’t know. But perhaps because of our business practice of full disclosure they knew what to expect. 

  • http://www.avoidbk.com/ Jared Strauss

    Hi Scott, 

    I appreciate the debate. Suggesting the use of a 401k to fund settlements is far from giving investment advice. It’s simply debt advice for the purpose of solving a debt problem. 

    I agree with you that it’s not as logical for someone who has the option to file chapter 7. Which is why I pointed out earlier that most of our clients are faced with chapter 13′s. We push people towards bankruptcy when it makes more sense for them. 

    In respect to retirement cost. Your calculations are somewhat semantical considering that you’re not weighing the costs of interest on the debts if they were to remain. Or, how about the costs of stress, highly probable lawsuits, post charge off interest, non-cooperative creditors, and debt settlement fees of 20% of what is owed or more? Oh, and how about that 90% failure rate. What is that worth to you? 

    It’s also quite possible that the consumers largest cost will be the cost of future credit. Why keep a consumer’s credit down for 3 or 4 years, when they could immediately resolve their issues and rehabilitate. Why force people into 21% or higher auto loans, when they could qualify for much less if they were able to resolve their situation more quickly? Calculate this cost too while you’re at it.

  • Scott Johnson

    My error on the calculation to restore the account and no time to due amortization schedules – in between conference calls

    Let’s just evaluate the loss you stated
    So what is the loss of $5,244.60 for a retirement age of 65?

    Age
    25        Years   40        Cost     a.$155,258.00
    35                    30                    b.$66,559
    45                    20                    c.$28,533
    55                    10                    d.$12,232
    60                    5                      e.$8,009

    Mean Cost       $58,367.+ ($28,533) = $86,900
    Median Cost   $58,367. + ($54,118) = $112,458

    So using the variable of just age and no other factor it
    appears to be a monumental liability of recommending using retirement funds to
    settle debt which impacts a consumer’s investment.

    I am having trouble understanding how a consumers debating
    spending $1,500 for a Chapter 7 V. $112,458 that takes 5 years would choose
    your option – other than a moral argument

    Investments Professional Defined– http://www.finra.org/Investors/SmartInvesting/GettingStarted/SelectingInvestmentProfessional/P117278

  • http://www.avoidbk.com/ Jared Strauss

    5932.20 paid to themselves 

    1094.10 paid to themselves 

    12,270.90 counting interest and loss – is actually 5244.60. You didn’t subtract the interest that they paid to themselves.

    So, the total’s are: 

    Current Settlement  = 

    $44,850

    Service Fee = 

    $8,272.50 

    Lost value of retirement account  = 

    $5,244.60 

    Total cost = 

    $58,367.10

    There is a definite risk of job loss and having to pay taxes and a penalty. That is why we recommend to factor that in, just in case. Also, keep in mind, most of our clients are debating Chapter 13′s, not 7′s. 

    • Charles Phelan

      It would also seem appropriate to look at what happens to the debtor if they continue to maintain $100k in debt. Running $100k through a minimum payment calculator, and assuming average APR of 18%, I get $149k in interest paid over 571 months. Obviously, no one will stick with minimum payments for 47+ years, but it illustrates the interest trap quite clearly.

      Let’s see — should I raid the “piggy bank” to the tune of $58k and get out of debt in a matter of months, or pay out $249k over half a century? Gosh, that’s a tough decision. :-)

      Also, I think the lost value of the retirement account may be overstated. Where the heck is anyone getting an 8.5% average annual return on their 401k accounts?

      Further, anyone sustaining minimums on $100k is probably no longer *funding* their 401k account, so a completely accurate analysis would also have to include lost opportunity cost on funds never invested (but instead diverted to interest payments).

      • http://www.avoidbk.com/ Jared Strauss

        Charles you make a great point. In the above example, the consumer has freed up approximately $2,000 a month. Scott, if they wanted to, they could replenish the loss you’re referring to in less than 3 months. Then, they would mitigate their future retirement losses and would have a budget that was approximately $2,000 less going forward. All the while, everything has been resolved, credit is rehabilitating, no more phone calls and letters, no more exposure to lawsuits, interest, and uncertainty.

      • Angelo

        Charles, your numbers reflect the cost of a “do nothing” strategy compared to borrowing money from an IRA.  The only time I’ve seen 50% balance increase is with Cap1 accounts.  If you are going to compare, at least compare apples to apples.  Consumers in a traditional debt settlement program with $100k will pay back about 55% ($55,000) and that includes fees.  Jared’s numbers are based off the old upfront model that does not even exist anymore so his numbers are also incorrect.  

        The question that Scott asked (which has still not been answered) is one of liability.  Soliciting consumers to borrow from their IRA’s is giving financial advice and there should be liability.  Personally, I think its irresponsible to convince consumers to tap into their retirement accounts to cover unsecured debt for this one reason….let’s assume that Jared’s numbers are accurate when he states that 90% (which is way off) of consumers fall out of settlement programs, what he’s neglecting to mention is that most drop out because their financial situation worsened so you have now put them in a position where they cannot payback the loan and your “financial advice” just cost them their retirement. 
         

      • Charles Phelan

        Angelo, sorry, but you lost me on the “50% balance increase.” I assumed $100k as a static debt load, 18% APR, paid off via normal minimum payments, yielding a 571-month amortization. It came out to $149k in interest paid, plus the original $100k, so $249k total payoff via minimums. What’s this about a 50% balance increase?

      • Angelo

        I misunderstood the $149k as increase in balance so the 50% was off but still has nothing to do with the comparison.  Borrowing from IRA to pay off debt vs a debt settlement program is what was being compared.  Paying minimums is a “do nothing” approach that had nothing to do with the comparison and more to do with justifying tapping into consumers IRA’s.  Sorry, I still think it unethical to do that.

      • Charles Phelan

        Angelo, I understand and respect your position. I just happen to strongly disagree with you, mainly because I have hundreds of satisfied clients who have used retirement funds to compress their settlement timeframes from 3-4 years to 6-12 months. I’ve been taking this approach with clients for many years, and had nothing but success with it and zero complaints. Not only do I consider it ethical — I view it as my *responsibility* to make consumers aware of any and all options for aggressively funding a fast-track settlement process. To my way of thinking, that is a far more ethical approach than telling consumers they can take 36-48 months to settle their debts and still expect a successful outcome.

      • Angelo

        Replying here because I could not reply to Charles’s post…

        Charles, it’s all good.  We can certainly agree to disagree.  Unfortunately, with the DIY theres no way for you to track how many of those hundreds of satisfied customers actually paid back those loans within the 6 months if at all?  To me, nothing is worth the risk of losing a retirement account.  We’re talk about consumers who can no longer afford their minimum payments, their retirement is all they have left.  Even if only 10% do not pay it back its not worth the risk.  I can tell you that not one of my clients have ever lost their retirement, ever. 

      • Charles Phelan

        Angelo, fair enough, but I’d like to make just one more point. Today’s discussion/debate on the merits of tapping 401k or IRA funds for purposes of debt settlement was too general in nature. To me, it’s something that must be evaluated on a client by client basis. If I’m talking to a 35-year-old with great future career earnings potential who had a failed startup business, would have to otherwise file Chapter 13, and he wants to borrow against his 401k to whack the debts as quickly as possible, I see nothing wrong with that. On the other hand, if I’m talking to a 60-year-old who qualifies for Chapter 7, there’s no way I am going to even recommend debt settlement, let alone tapping the nest egg. To me, it just doesn’t make sense to take a rigid general position on this issue.

      • http://www.avoidbk.com/ Jared Strauss

        ” Angelo, fair enough, but I’d like to make just one more point. Today’s discussion/debate on the merits of tapping 401k or IRA funds for purposes of debt settlement was too general in nature. To me, it’s something that must be evaluated on a client by client basis. If I’m talking to a 35-year-old with great future career earnings potential who had a failed startup business, would have to otherwise file Chapter 13, and he wants to borrow against his 401k to whack the debts as quickly as possible, I see nothing wrong with that. On the other hand, if I’m talking to a 60-year-old who qualifies for Chapter 7, there’s no way I am going to even recommend debt settlement, let alone tapping the nest egg. To me, it just doesn’t make sense to take a rigid general position on this issue.” 

        Exactly. Well said, Charles.

      • http://GetOutOfDebt.org Steve Rhode

        I’m curious now, how much does the 35 year old have in his 401k and how much would he take out?

      • http://www.avoidbk.com/ Jared Strauss

        Hi Steve, 

        Let’s maintain the same example from the article, he takes out $53,122.50. In order to do so, he would need to have a balance of $106,245. 

      • http://GetOutOfDebt.org Steve Rhode

        For me the heart of the matter is if a consumer has a full understanding of what the loan or withdrawal will cost and what the risks are for the loan from money that is already creditor protected.

        I’m also curious why this person would have to file a chapter 13 bankruptcy. If they have significant assets to protect, would settling leave them more exposed to tax liabilities since they are more likely not to be insolvent?

        It’s not the payback of interest but the lost return and the significant money that would have to be replaced to put that person back into the same position, that concerns me.

        If a consumer understands all these risks, and the possibility of having to repay the entire loan on job separation and still wants to remove creditor protected funds then that’s their choice.

        But should we assume that people that advise such 401k withdrawals make sure consumers understand the massive lost investment cost of the 401k reduction?

        If not, it’s my opinion, that using the same hyperbolic discounting economic behavior that led many into trouble, they may rush to tap the 401k without awareness of the potential severe economic consequences they may experience later in life when they need that money most.

        I’d love for you to send me a real life anonymous person that we can post and take a look at a specific situation. I agree each situation is different but it might be beneficial if we talked specifics.

      • http://www.avoidbk.com/ Jared Strauss

        Hi Angelo, 

        I’m curious, if traditional debt settlement is achieving 55% with their fees included, why does virtually every website with that business model disclose 71%? My numbers are based on the models that exist today. In fact the only reference I made to the traditional debt settlement fee method was the 20% of debt enrolled being the typical fee. Is it not? 

        I answered Scott’s question. I’m strictly giving debt advice to solve a debt problem. It has absolutely nothing to do with investments and I have never purported such. The discussion about a 401k is simply to review it’s use as a financial resource. That’s it. If my warnings regarding the negative affects are seen as otherwise, that was not my intent, it was simply for the purpose of full disclosure. 

        If you have information regarding the success rate being higher, I’d love to see it. My 10% statement is derived from the GOA report and this website. I’m not a sensationalist, I would love to be able to say it was higher. 

        Also, you’re not factoring in the end result of settling simultaneously correctly. Let’s pretend they do lose their job. We’ll stay with the same example and the loan converts to a withdrawal. Their 401k payment would no longer be due, thus freeing up $3,000 a month, rather than $2,000. At 25% federal, the tax would be $13,280.63. Figure 6% state, $3,187.35. And a 10% penalty, which is $5,312.25. The penalty would probably be paid from their remaining proceeds in their 401k. I’d imagine the tax would have to be paid out of pocket. So, a similar strategy could be imposed in relation to countering the loss or retirement by dedicating the freed up cash flow towards it until it’s replenished. In this example, a little over 5 months. Furthermore, I would imagine they would probably net some of that money back when they do their taxes the following year. And then, with $3,000 a month freed up they could go nuts building back their retirement.

        Also, I don’t expect everyone to agree with me or our strategy. I am very aware that the old school perspective is stay away from it. I get that. Also, as I have mentioned a couple times now, chapter 13′s are the typical alternative for this segment. If I were targeting people that could qualify for chapter 7′s I’d agree with you not liking it. But what you may be failing to take into account, are the costs of not resolving ones issues quickly. I fail to see how it makes sense to expose yourself to the risks of traditional debt settlement if another option to resolve your situation quickly exists. Please enlighten me.  

           

      • Angelo

        100k debt settled at average of 40% (my averages, backed by 5 years of data) = $60,000 savings x 20% of savings = 12,000.  

        $12,000 – fee + $40,000 – settlements = $52,000 payback
        ($12,000/$100,000 = 12% of debt fee)

        Lawsuits covered by the Veritas Legal Plan – full legal representation through trial if necessary on every account = peace of mind, less stress, lower settlements, higher completion rates. Includes full FDCPA protection against harassing creditors.  Combine that with a performance based debt settlement company who takes fees at settlement and every issue mentioned in this post is covered without the risk of the consumer ever losing their retirement account.  

        Im enjoying the debate but lets at least use realistic numbers.  Id be willing to bet that any DS company averaging 71% is an attorney model taking huge upfront fees.

      • http://www.avoidbk.com/ Jared Strauss

        I’m enjoying the debate too, Angelo. This is fun. :) 

        The number’s I’m using are the reported general averages for the industry. Naturally, some companies may achieve better results than the industry average, you appear to be one of them. That’s great. 

        You may want to adjust your website to advise your future customers that you only charge 20% of savings rather than the 30% you advertise on there. I say that without sarcasm. Consumers are becoming cost conscious these days and that difference will help you.  

        Also, 38% of your clients accounts go through litigation? I fail to see how that leads to less stress.  

        So, if I enroll with 10 accounts, is it safe for me to assume that I’ll end up getting sued by 4 of them? Please elaborate.

        The 40% average is great. Nice job. I’m curious though… what percentage of your clients settle all of their debt? I noticed on your transparency page that you cover how many clients settled 1, 2, and 3 accounts, but what about all of them? 

        Also, the most important stat of all, in my mind, is the outcome of all enrolled accounts. What percentage of all of your enrolled accounts have been settled? 

        I’m not trying to pick at you. I’m actually very interested to hear this information from you. So, please share. 

        The reason I ask these questions, is in my personal opinion, if a consumer uses their 401k or IRA to settle their debts, in most circumstances they resolve all of their enrolled debts. So, if they do forfeit their retirement, by either cashing out or by defaulting on their 401k loan, they have solved their debt problem and can move forward with a much more comfortable monthly budget. That cash flow could be used to quickly build their retirement account back up. Meanwhile, they will be rehabilitating their credit and will save even more money on future credit purchases, which in turn, will allow them additional freed up cash flow to put towards their retirement. 

        When you’re settling over time and fall out of the program, like you alluded to earlier, you still have remaining problem debts (which I would imagine, all would be charged off), possible lawsuits to contend with, and then all that money that was spent on settlements without a complete solution to their problem. The credit still sucks, the dangers still lurk, and what now? How does this person solve their problem?  

        Personally, I would rather solve my problem and have a liquidated retirement account and dramatically lowered monthly expenses. 

        With my problem solved, I could go hog wild with building my retirement account back up. And, if things did turn for the worse, I wouldn’t have all of those problem debts causing me problems and my monthly obligations would be greatly minimized, thus allowing me a much better opportunity to manage my situation.   

        I look forward to your response. Thank you for taking the time. 

         
           

      • Angelo

        Not sure why I cant reply to your reply Jared…
         

        No doubt Jared, healthy debate is what will help bridge the
        gap between our industries so I welcome the questions.  Unsubstantiated claims is one of the biggest
        problems with this industry, unfortunately there is no standard reporting
        system.  Some claims are made from
        original balance vs balance at settlement; some include fees while others don’t.  Until there is uniform reporting system all
        these claims are pointless but that wasn’t the debate.  The debate was whether or not convincing
        consumers to cash in their retirement account to pay off debt.    

        By the way, I think you misread the claims of lawsuits.  38% reflects the number of overall accounts
        enrolled, not the percentage of clients who have received a lawsuit.  The next sentence clarifies that: 

        “Average
        client enrolled had 7 accounts; please note this number does not reflect 38% of
        all clients but 38% of accounts.  Depending on the state, some clients
        receive lawsuits on more than one account enrolled.   Lawsuits are likely and Active Debt Solutions
        will continue to negotiate on the client’s behalf to reach a settlement. Less
        than 1% of all client accounts experience any escalated levels of legal
        activity such as a lien or wage garnishment.

         

        You wrote….Also, the most important stat of
        all, in my mind, is the outcome of all enrolled accounts. What percentage of
        all of your enrolled accounts have been settled? 

         

        Im not sure I understand the question.  If the debt is enrolled, it eventually gets
        settled. Not all at 40% but they all get settled eventually.  By the way, I do not take a fee on
        settlements above 70%; I feel consumers can negotiate 70% settlements on their
        own.   I do have clients who are enrolled
        with one unsettled account if that is what you are asking but Im confident they
        will settle in time.  Depending on the
        state, I might even get lucky and hit the statutes of limitations and the debt
        can no longer be collected. 

        While I understand your logic in suggesting using retirement
        funds its bias because you are looking to collect and get paid, I can see the
        temptation.  Trust me, I can do the same
        thing and earn a big fat fee for settling the debt with those funds but again,
        the #1 reason most people fall out of debt settlement programs is because their
        situation gets worse and if that happens they will lose their retirement.  I have to believe at least one person that you
        convinced to cash in their IRA was not able to pay it back and to me it not
        worth the risk. 

        You wrote….When you’re
        settling over time and fall out of the program, like you alluded to
        earlier, you still have remaining problem debts (which I would imagine, all
        would be charged off), possible lawsuits to contend with, and then all that
        money that was spent on settlements without a complete solution to their
        problem. The credit still sucks, the dangers still lurk, and what now? How does
        this person solve their problem?  

        I addressed the lawsuits in my previous post but Im not sure
        what you mean by “all that money that was spent on settlements without a
        complete solution”?  What money was
        spent?  I only charge and collect a fee
        when a debt is settled so please clarify? 
        There are only 4 options to consumers….Do nothing, DMP, Settlement or Bankruptcy.  Most consumers who fall out of the program do
        so as a result of their situation getting worse so the next step would naturally
        be chapter 7 bankruptcy. 

        You wrote….Personally,
        I would rather solve my problem and have a liquidated retirement account and
        dramatically lowered monthly expenses. With my problem solved, I could go
        hog wild with building my retirement account back up. And, if things did turn
        for the worse, I wouldn’t have all of those problem debts causing me problems
        and my monthly obligations would be greatly minimized, thus allowing me a much
        better opportunity to manage my situation.   

        Personally, I’d rather keep my retirement safe and out of harm’s
        way.  I would never take unsecured debt
        and secure it with my retirement account. 

        Thanks again for the friendly debate, I know Im not going to
        change your mind but I certainly enjoyed the conversation. 

        Best,Angelo

      • http://www.avoidbk.com/ Jared Strauss

        Angelo, but those answers to these questions do matter. We aren’t just comparing debt settlement to retirement accounts, we are comparing using your retirement account to settle your debts vs. traditional debt settlement. So, please answer them.

        What I was asking in respect to the 38% of enrolled accounts that receive lawsuits, is that if I enroll 10 accounts into the service, that per the 38% average of all accounts being involved with a lawsuit, that it would be safe to assume that it is possible to be sued on average by 4 of my creditors. 

        By enrolled accounts I mean all enrolled accounts that were placed with your firm. So, if you have 1,000 clients and they each enrolled 10 accounts each, your total enrolled accounts would be 10,000. How many of those have been settled? And, when you answer this, feel free to just include your completed and unenrolled clients. There is no need to include your current client base, as I realize that you haven’t had the time for them to complete their program. 

        My perspective towards 401k’s and IRA’s certainly could be perceived as biased, I agree. But, I would never put anyone into a situation that I wouldn’t put myself in. I believe our 10 years of operating with no complaints illustrates that. Also, you should recognize that I greatly limit who can qualify for our services, by just offering the simultaneous approach. Our services are incredibly niche. And, less than 10% of consumers we talk to have the ability to enter our service. And, keep in mind it’s not just 401k’s and IRA’s, they also get their funds to settle from family, selling assets, annuities and cash-value life insurance policies. I would make way, way, way, way, way more money, if I offered our debt settlement service over time, especially if I offered it over 24 – 48 months. Because then, instead of finding that needle in the haystack, I would be able to offer my services to almost anyone. 

        I enjoyed the discussion too, but please answer these questions for accurate comparison sake. Thank you. 

      • Angelo

        Ah, you tricked me.  Your article talks about the strategy of a debt collector I was not aware that you are a debt settlement company….well played.  Ok, now it all makes sense. 

        You are right, the number of consumers who can payback all of their debt before charge-off is very small and I dont knock your niche or your way of doing business at all. (Except the IRA/401k thing).  We always encourage our clients to beg, borrow and steal to come up with additional funds to settle but many simply cant because of true hardships and want to avoid or simply do not qualify for a Chapter 7.  So naturally it will take longer to settle because the duration is based on the clients ability to accumulate funds.  What do you tell those who can’t payback full balance before charge-off, do you suggest BK and send them on their way?  

        Please dont take this the wrong way but if a consumer can afford to payback before charge off and avoid everything we discussed then they dont belong in a settlement program to begin with.  

        Its probably best to just agree to disagree at this point.  I enjoyed the debate and wish you the best. 

        Have a great weekend,
        Angelo

      • http://www.avoidbk.com/ Jared Strauss

        Haha, that’s funny… :) 

        It’s not just before charge off though. We get clients that are in collections too. Our process when a consumer contacts us is to review their ability to settle their debts right away. If that ability doesn’t exist, but they may be able to settle their debts in 12 – 24 months, we refer them to ZipDebt and the Consumer Recovery Network for a DIY approach. Both ZipDebt and CRN are very careful to analyze the consumers ability to settle and generally prefer a client that can settle in 12 months. In certain situations they may feel comfortable extending that to 18 – 24 months. 

        So, situationally, but typically, if a consumer can’t settle their debts in 24 months, we generally suggest bankruptcy. 

        I don’ take that the wrong way, that is one reason why we offer a Debt Relief Prevention service. They may not need our Debt Settlement service. We prefer they solve their problem with their credit intact, when possible. Which is why they must be behind 60 days in order to enroll into our debt settlement service. 

        That’s fine Angelo, but be aware that we are agreeing to disagree without all of the facts on the table. 

        Thank you. You have a good weekend too. 

      • http://www.avoidbk.com/ Jared Strauss

        Steve, there isn’t a reply button on your post, so this is a reply to you, not to me. :) 

        Exactly, full disclosure is so critical.

        That is also exactly right, it is possible that this example could be subjected to taxes on the settlements. That is why we feel it is so important for the consumer to really dig deep and meet with an accountant prior to committing to using their 401k or IRA. There is a good chance it may not make sense for them to proceed. Using the 401k or IRA is very situational. Edit: A good example being, being faced with a Chapter 13 due to not qualifying for the means test income wise.

        Your concern about the lost return is just, but as we outlined in these comments, that can be overcome by replenishing that difference with their freed up cash flow, after they settle their debts. It appears that in most situations, it should only take a matter of months to fully do so.

        I believe we should make sure they are aware of that, absolutely. Again though, it appears to be fairly easy to remedy with the above described tactic.

        I appreciate you offering to do that. I just called one of my clients that completed our services 8 years ago by using a loan from their 401k. So, you will be able to analyze 8 years of their life after the fact, as well. He has given me permission to give you his name and number and will be available on Monday at noon, central time.

        Steve, please let me know if you will be able to speak with him then and I will forward his information to you.

  • Scott Johnson

    For educational purpose only as I am not a registered investment advisor and trying to find clarity of consumer benefit and limiting exposure

    So recommending to a client to take out a 53,122.50 loan on
    a retirement account and then receiving compensation from the release of said funds
    it costs and impacts a consumer -
    Loan Cost to a consumer 60 months @ $1002.49 = 60,149.40
    Current Settlement      = $44,850        Actual after interest   =  $50,782.20
    Claimed Service Fee   = $8,272.50     Actualafter interest    =  $9,366.60

    Total Cost of Program = $60,148.80

    Lost Value of Retirement Account
    53,122.50 @ 8.5% Return  5 years = $65,393.40      

    Loss of $12,270.90

    Actual Cost of your recommendation
    for repayment of Unsecured Debt = $72,420.30

    If a consumer during the 5 years of repayment of the loan has a life changing event and cannot repay the loan and defaults? This strategy appears to increase exposure and reduce any benefit of repaying less than full balance. I would weight the value of a retirement account significantly more valuable than unsecured debt hence labeling debt as mere in comparison.

  • http://www.avoidbk.com/ Jared Strauss

    Hi Scott, 

    We’ve been in business for over 10 years and have never had any complaints. We make everyone aware that their retirement accounts are protected. That information is on our website too. You’ll also find a plethora of other disclosures and recommendations to meet with bankruptcy attorneys and accountants on there, as well. Our business isn’t designed to talk people out of bankruptcy. We exist for people who prefer to avoid it.

    I’m not sure why you would consider settling a consumers debts a mere purpose. I know that our clients that have elected to use our services didn’t consider it a mere purpose. I certainly don’t. 

    In my mind, not mentioning this as an alternative to settling debts over time is a liability. Why put a consumer through 3 or 4 years worth of stress, possible lawsuits, unknown costs, sustained destruction of credit, and an end result that is 90% likely to fail? When they may have a way to resolve their situation quickly and with the benefits of knowing what their overall costs will be, along with the minimized exposure to lawsuits, interest, and long term credit issues.

  • http://www.avoidbk.com/ Jared Strauss

    Hi Scott, 

    I’m not giving investment advice. Full disclosure is important to me. I just want to ensure that if a consumer is debating the above, that they understand all of the costs and pitfalls that may be involved. I do point out in the article that they should seek professional advice prior to committing to their plan. 

    We do not offer our services nationwide. The states that we offer our services in are listed on our FAQ page.

    We are not registered with the SEC/Finra. To my knowledge there isn’t a need for us to be.  

    We are not a licensed Credit Service Organization. We are a boutique. We only operate in states that don’t require licensing. I wish we could offer our services in other states beyond the ones we do, but it doesn’t make sense to incur all of the costs and to spend all of the time when our shop is so small.

    • Scott Johnson

      Does a recommendation to adjust a protected retirement vehicle that affects future potential growth of  the investment for the mere purpose of settling unsecured debt have significant liability?

  • Scott Johnson

    I found this article quite interesting and to start had a
    few questions I was hoping you could answer

    What are your qualifications and licensing that you have to
    give investment advice?
    Is your firm nationwide?
    Are you registered with the SEC/Finra?
    Are you a licensed a Credit Service Organization?

    Thanks in advance

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