This is part 1 of a 7 part series covering debt settlement advice for both the debt settlement industry and consumers. Throughout this series, we will be taking an in depth view into the various aspects of debt settlement, their best practices, and their effects on consumers.
Our first topic is about…
Part 1. Enrolling into a Debt Settlement Program when a consumer is on time with their payments
I get a lot of calls from consumers that are not yet behind on their payments, but see it coming. In my opinion, any form of debt relief shouldn’t be offered to this consumer until they have been educated about, and had the opportunity to review, their other options that would permit them to solve their problem and maintain their good credit too.
This particular consumers’ first action should be to evaluate their financial situation, to determine if they can reorganize their obligations in an effort to lower their monthly payments, without any destruction to their credit. Their various methods of doing so can include, transferring the balance to a lower interest rate card, selling an asset to generate funds to pay off some or all of their debt, selling an asset that is tied to an existing loan; in order to pay off the loan and eliminate the monthly payment, debt consolidation loans, loans from family, and so on.
In order to provide an outlet for professional help for consumers who are in this situation, we offer a service that is designed to do just what I described above. We call it the “I’m on time with my payments. What do I do? service. I know it’s kind of corny, but hey, it describes exactly what it is. The point of the service is to give consumers an option to solve their problem without debt relief.
There are a few motivating factors in respect to why we offer this service. First, it’s the right thing to do. If I were a consumer in this situation, I would want to be sure that I did everything I could to maintain the good credit that I had worked so hard for. However, the biggest reason we offer this service to consumers who are on time with their payments, as opposed to debt settlement, is the end result.
What some debt settlement companies fail to tell consumers, is that the balances will increase by about 15% from the time the accounts are current to the time they charge-off. So, let’s do some math…
- $30,000 in credit card debt
- Approximate total at charge-off in 6 months $34,500
Okay, so now the total is approximately $34,500. Remember, it started at $30,000. Now, let’s assume that they settle all the debts for half.
- $34,500 x 50% = $17,250
Now, let’s add in the typical debt settlement fee, which is 20% of what is owed at the time of enrollment.
- Debt settlement fee $6,000
The total is up to $23,250 now. I wish we were done, but I’m not…
Now, lets talk about taxes. If the consumer is not insolvent, insolvent meaning they have a negative net worth, they will also have to pay taxes on the amount that they save. Let’s assume a 25% tax bracket.
- $17,250 x 25% = $4,312.50
The final total is $27,562.50.
So, if a consumer is solvent and has to pay 25% in income tax, they will potentially save approximately $2,437.50, or 8% of what they owe. And, that is based on the assumption that they actually settle all of their debts for 50%. Enter expletive of your choosing here!
What I don’t quite understand, is why we’re the only debt relief company, that I’m aware of, that offers consumers this alternative. Why are people in the described situation steered into the above scenario? I just don’t get it.
Perhaps debt settlement companies can follow our lead and institute a 60 day delinquency policy. Meaning, that they won’t enroll a consumer into their debt settlement program until they’re 60 days behind. Or even better, perhaps they can genuinely implement and offer a service like the one we have. By doing so, they will be able to ensure that their clients best interest is always in mind.
Anyway, I hope this article helps people who are proactively seeking debt relief, debt negotiation, or debt settlement, so they don’t end up making a huge mistake that leads them into a situation where they end up paying close to what they originally owed, with annihilated credit or worse.
Part 2 or this 7 part series will be posted next Monday. I encourage you to subscribe to both Steve’s and Debt Relief A La Carte’s RSS or email feeds for notification.
If you’re a consumer that has suffered from a situation like this, please share your story in the comments. It will help with making both consumers and debt settlement companies more aware of the ill effects of debt settlement when not utilized correctly.
Debt Relief A La Carte, Inc