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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.

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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”

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!!!!

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

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.

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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.
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