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The Hidden Real Cost of Credit Counseling and Debt Settlement

By on March 24, 2013


With a more uncertain future for those headed towards retirement it makes logical sense that we need to make preparing for our own retirement a priority in our lives. All indications are there will be less financial help available for us when we do eventually retire and that will most likely be later than most expect.

So considering the importance of preparing for retirement, let’s look at the cost of making some common choices when dealing with debt and how much those choices can cost us in lost retirement.

This article is not designed to talk people out of credit counseling, but to help them make fully informed decision about what may be right for them knowing all the facts.

The Hidden Cost of Credit Counseling

Let’s look at the hidden cost of credit counseling. A consumer credit counseling plan is generally a five year repayment plan with payments made monthly. Many debt settlement monthly payment plans are similar in length.

In this example I’m going to use the figures based on a credit counseling program but the theory applies to any repayment program that takes a period of time and delays the ability to start saving fast.

I’m not aware of any debt settlement or credit counseling program that presents this information to consumers before enrolling them in their monthly payment programs.

Let’s Let the Numbers Speak

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For this example I’m going to assume our 35 year old family has $30,000 in unsecured debt they are enrolling into a credit counseling program.

The monthly payment for that program would probably be about $625 per month with another $50 added on as a fee for the credit counseling agency.

Over the five year period of the program the monthly fee, if it was saved and put in a low or no interest rate emergency fund, would be $3,000.

If the family did not enroll in an extended repayment plan and instead filed bankruptcy to discharge their debts quickly, the $625 monthly payment could instead be invested towards retirement.

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One such common place to invest is in mutual funds. As I write this some stock market index funds have returned over 15 percent over a ten year period of time. – Source

So if our family made payments of $625 a month for five years into their own retirement account instead of the credit counseling or debt settlement programs the fund would be worth $51,043.

It is safe to assume that retirement is going to be delayed until at least 70 for the future for such families.

If the example family was 35 when they started the five year program they would be 40 when they finished. If they did not make any more payments into their retirement fund and just let the $51,043 ride till they were 70, the fund would be worth $1,834,977. Money they could use for their retirement.

By enrolling in the credit counseling or debt settlement program our family is giving away nearly $2 million in retirement savings.

If they continued their $625 a month till age 70 the retirement account would be worth and estimated $4,019,330.

If the same family was 50 when they finished the credit counseling or debt settlement program their retirement fund would be worth $555,988. That still nothing to sneeze at.

What Does the Math Tell You?

Recently I wrote that people need to think like corporations when making financial decisions about what is right for them.

They need to carefully consider all the facts and make the decision about how to deal with their debt that is best for them.

So what do you think. Is enrolling into a monthly payment plan worth sacrificing millions in retirement?

Or when evaluated like that does a chapter 7 bankruptcy and getting back to saving quickly make more financial sense?

You can click here to find a local bankruptcy attorney and talk to them for free about your specific situation. Get the facts and then you can make an informed and educated decision if bankruptcy is right for you.

By the way, more than 70 percent of people that file for bankruptcy qualify to file a chapter 7 bankruptcy and discharge their debt in about 90 days.

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Do you think that considering the impact on retirement savings changes the way people look at credit counseling or does it even matter?


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About 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.

8 Comments

  1. Gary Ray Fraley, Esq.

    March 25, 2013 at 10:42 pm

    Unfortunately way too many debtors get directed to debt settlement plans that are unrealistic for their financial situation. Usually the people that supposedly, are able to make that 25% payment in fact can’t make any payment in the long run. Therefore, they will often liquidate assets, cash out 401(k) or IRA funds that were set aside for their retirement.

    I typically find people that do their budget and the budget shows hundreds of dollars of available funds. When I asked them what was happening to the money, they typically have no idea. When I actually go through the budgets with them I find that the numbers are totally unrealistic as to their actual expenses.

    I regularly see people who went to debt settlement programs and spent thousands of dollars only to have it fall apart because they could not afford the payments that were set up. People simply are not financially literate enough to understand what is happening to them. The only thing they know is that they can’t pay their bills and they are being hounded by creditors, collection agencies and attorneys.

    In my office, we do debt negotiations for clients. However, the only time that seems to be successful is where there is a single creditor and we can negotiate a settlement with that creditor. With a client comes in with a number of credit card accounts that are delinquent I seldom find that negotiations are going to help my client. Solving the problems with one creditor when there is a half a dozen other creditors out there is like putting out the fire in the garbage can while the house is burning down.

    The other issue that I regularly see, is where the clients negotiated a reduced payoff to a credit card. Inevitably, paying off that credit card albeit at a reduced amount typically is a waste of their money as a still have to file bankruptcy because of the other debts. The other problem that is not discussed with debtors by the debt negotiation agencies is the fact that they are going to get a 1099 form for ” forgiveness of debt”. this is also referred to as cancellation of debt income. Nobody seems to tell them that they’re going to have to pay income taxes on the “forgiven” debt. The worst of it is that the tax is on top of the highest tax rate the person has already based on regular income. To me that is a shame and a scam.

    Steve, I am glad to see you out there trying to do what is right for people and still make a living without taking advantage of them. When I wasn’t sure about your situation, I talked to other attorneys whose opinions I highly respect and they said you are the real deal.

    • Jared Strauss

      March 25, 2013 at 11:26 pm

      Hi Gary, great snapshot of your perspective of debt settlement. I completely agree with everything you said, except the part of settling if the client has just one creditor.

      It is very possible and even probable to settle of all the delinquent debts simultaneously. Assuming that the consumer has the funds available to do so.

      I started doing it in 2002. And have achieved great success with the approach.

      • Steve Rhode

        March 26, 2013 at 2:45 pm

        I would agree that a consumer that has cash on hand to settle in lump sum payments is in a better position to accomplish their goal.

    • Steve Rhode

      March 26, 2013 at 2:44 pm

      Thanks for the pat on the back.

  2. Cathy Moran

    March 25, 2013 at 12:17 pm

    On point once again. I did a similar exercise for Bankruptcy Law Network assuming minimum payments (before the law required larger minimums). http://www.bankruptcylawnetwork.com/mbna-ira-financial-choices-personal-responsibility/

    American Express does not have to retire, but my clients do.

  3. Dorothy Bunce

    March 25, 2013 at 12:14 pm

    You cannot file a Chapter 7 Bankruptcy and expect to get a discharge with $625 left over in your budget every month as disposable income. And you can’t redirect this money into retirement and expect to qualify to file Chapter 7 Bankruptcy either. While I believe Bankruptcy is beneficial, as you might expect from a Bankruptcy lawyer, you can’t have your cake & eat it too. If a debtor could pay 25% of their debts off over a 60 month period of time, the Bankruptcy Court is going to require them to pay all of their disposable income towards paying creditors into a Chapter 13.

    • Steve Rhode

      March 25, 2013 at 12:56 pm

      I know many bankruptcy attorneys that do the long form and make it work.

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