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…
- 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.
- 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.
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.
- 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.
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.
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.
Debt Relief A La Carte, Inc