The following is a guest post. And while I personally might not agree with some of the points of view, I think it is important for people to hear from different sides.
Given what I think is going to be an exploding retirement crisis I am now more convinced that for those near or over 50 with little to no retirement savings an extended repayment plan like credit counseling sets them up for a potential disaster when they hit retirement age. You can’t unwind that clock.
First off, I’m a fan of nonprofit consumer credit counseling services. They serve a great purpose for people who would rather not settle their debts or for those who require assistance with budgeting or managing their money.
However, I take a bit of a different perspective to credit counseling and debt management plans compared to what you’ll normally read on the Internet.
When I encounter consumers who are behind on their debt I base a lot of my opinion on what’s best for each situation on the amount of time it will take to recover and reestablish credit again.
That is one of the reasons why I only offer debt settlement to consumers who can settle all of their delinquent debts right away. By limiting my services to simultaneous debt settlement, I’m able to provide my clients an outlet where they can resolve their debt and begin the process of recovery, on average, in just a few months. And because of the expedited resolution, they generally begin to reestablish their credit within about 2 years of completing my services.
What I commonly read on the Internet, and you may have too, is that credit counseling should be the first thing you look into when struggling with your finances.
Then bankruptcy if you can file a Chapter 7.
That’s the typical waterfall of suggestions.
Why this waterfall of advice is somewhat of a misnomer…
However, with my coming from the collection industry previous to starting Debt Relief a la carte, I had the chance to identify the two biggest issues with the typical debt settlement approach that so often causes harm to consumers.
What are they?
- Premature representation
- Debt settlement program durations
I wrote an article on getoutofdebt.org about a year ago, describing the aspects of premature representation that take place when consumers hire a debt settlement company to represent them previous to possessing the financial ability to settle.
It’s a huge issue, because when this takes place, consumers are immediately put into an adversarial situation with their creditors merely due to the debt settlement companies’ premature involvement. When in reality: that’s the last move people who are behind on their debts with no money to resolve them should ever make.
If you were in the Wild West 150 years ago, would you go to a gunfight without a loaded gun? That’s exactly what these long-term debt settlement companies encourage consumers to do.
If you want to succeed at settling your debts, your safest and most reliable approach is to settle them right away in a simultaneous way. And if you can’t do that, it’s vital that you find a way to do it fairly quickly. To avoid the aspect of premature representation, you’ll want to do-it-yourself.
Program durations: otherwise known as the projected length of time to complete the plan
The other issue is the program durations that are commonly offered. I personally don’t recommend debt settlement if it can’t be completed within 24 months or less. And ideally 12 months or less.
The reason why I make this recommendation is due to the dangers that you will be exposed to as your accounts age and flow through the collection cycle. Read about how debt settlement works to gain a better understanding of the dangers I’m referring to.
Yet, even though the debt settlement industry as a whole realizes that the longer the debt settlement plan is projected to take the less likely it will be successful, the most commonly advertised program durations, virtually by all debt settlement companies in the industry, are 36 – 48 months.
My point here is that the misnomer I’m referring to is due to the author’s of the content you’re reading not knowing about these more intelligent and consumer friendly programs that are out there. I’m a one-man company. Trust me, they definitely don’t know about me and my unique service. Unfortunately.
And most of them don’t know about two other amazing companies: ZipDebt and the Consumer Recovery Network. Both of these companies offer training and continual coaching for consumers who need to settle their debts over time. These guys are smart and more importantly: highly ethical.
They too saw the problems with premature representation and program durations as being the main causes for failure and harm to consumers.
And what did they do about that? First: they limited their services to consumers who can settle in 24 months or less (with strong encouragement to fund the settlements with additional financial resources in order to expedite the process). And second: they decided to teach people how to settle debt on their own so they wouldn’t be prematurely represented.
And please know, I used to offer a DIY debt settlement service myself. But once I found these two companies, I discontinued it and refer to them instead.
Why I think you should consider debt settlement before credit counseling…
Now let’s get back to the waterfall stuff. As I mentioned earlier, I base a lot of my opinion on the amount of time it will take to recover and reestablish credit again.
Credit counseling is a bit murky. On the one hand it doesn’t impact your credit score directly. On the other hand it does, due to the common closure of accounts once a creditor agrees to accept a debt management proposal. The closing of your accounts, commonly reported as “account closed by credit granter,” generally has a negative impact on your credit score.
Furthermore, most credit counseling plans are projected to take 5 years. And most creditors report a special remark to your credit report while you’re participating in a credit counseling plan (it generally states: “account included in a debt management plan”).
That’s not to say that you couldn’t unenroll from the credit counseling plan 2 years into it and take over again. And if you do, the remarks about your involvement in a credit counseling plan will soon be removed. But if that isn’t a realistic opportunity that you foresee, you will more than likely reestablish your credit sooner by settling your debts.
This is why I think people should review debt settlement before credit counseling. Except instead of thinking 36- and 48-month program durations, think about your ability to settle right away. And if that capability doesn’t exist, think about debt settlement with program durations of no more than 24 months.
And while we’re on the subject, if you don’t find yourself financially able to settle your debts in 24 months or less: cross the option of debt settlement completely off your list.
Not only is it way more dangerous for you to go beyond 24 months without paying your creditors, but from a recovery standpoint, it doesn’t even make sense. Except for a small segment of consumers who can only qualify for a Chapter 13 and who lack the financial ability to settle quickly. And even then, most of those consumers are better off utilizing a hybrid approach of debt settlement and payment plans.
Now let’s get to the mathematical reason why I recommend considering debt settlement before credit counseling: the cost.
Credit counseling monthly payments can average 2% of your balance. So think about that for a moment.
You will pay approximately 48% of your balance in two years via credit counseling.
That’s also what you may be able to settle your debts for over a 24-month debt settlement plan, when settling yourself.
So my logic should be astonishingly obvious at this point. For a similar monthly cost you may be able to settle your debts in 2 years or less.
So let’s see… For roughly the same payment amount as a 5-year debt-management plan, you potentially get out of debt in 3 years’ less time. And if you do, you reestablish your credit in 3 years’ less time.
Furthermore, your risk of failure should be less, due to the reduction of time. Obviously a 5-year plan would be more exposed to life events that may inflict you with additional hardship and cause you not to complete the program (a lot can happen over 5 years). Although, I don’t want to sugarcoat 2-year debt-settlement plans, they do still come with some risk. Which is why I highly recommend hiring a debt coach so you can do-it-yourself.
So if you’re comfortable with the risks, why take that long and expose yourself if you could cross that finish line in 2 years for roughly the same monthly expense? And when you consider the overall expense, it’s even more of a no-brainer.
For example (these are loose figures based on the 2% payment requirement for credit counseling), if you have $40,000 in credit card debt your monthly payment will be $800. If you can settle your debts within 24 months with that same $800, you will spend (36 x $800) $28,800 less than if you completed a 5-year debt management plan.
So do credit counseling services make sense for anyone?
They do. When you settle your debts over time, your creditors will attempt to collect from you. You’re going to get lots of phone calls and communications from debt collectors. At first these calls and letters will be fairly customer-service oriented. But as your accounts age and become more delinquent and travel through the collection cycle, the collection efforts will become more intense.
Not everyone can handle the exposure to that stress. In fact, I’ve written another article about how to match your debt relief options with your personality. It is designed to help you take a realistic perspective of your situation, so you may determine if you can handle the stress associated with settling over a longer period of time.
For those who can’t, a debt management plan can make sense. They’re safer than a debt settlement plan, in the sense that your accounts will be receiving monthly payments and your creditors won’t be attempting to collect from you while you’re participating in the plan (assuming that your accounts aren’t already charged off).
If you end up taking the option of debt settlement off the table, and your remaining logical choices are bankruptcy and credit counseling, something you’ll want to consider is that most people who file Chapter 7 bankruptcy generally begin to reestablish their credit within 2 years of filing. Whereas if it takes you the full 5 years to graduate from your debt-management plan (as it often does), you’ll be looking at a full 5 years before you will really begin to reestablish your credit again.
Have debt management plans been rendered obsolete?
As demonstrated, people who qualify for a 5-year debt-management plan have a high probability of settling their debts in 2 years or less with a similar monthly expense.
I believe this math and information illustrates the need for creditors to revisit the concept of old-school credit counseling, since the terms are creditor controlled and not actually negotiated. Credit counseling used to be a combination of debt settlement and debt management, by reducing the principle (sometimes by as much as 40%) with the option to pay it over a 5-year plan.
If concessions of 40% were available over 5-year terms it would lower the monthly payment by 40%. Thus, making credit counseling more relevant in today’s society by providing a solution for more consumers who are otherwise forced to turn to more unreliable long-term debt settlement programs (programs greater than 24 months).
So if you can’t settle your debts right away, or in 2 years or less, or if you prefer to avoid debt settlement altogether: there are many nonprofit credit counseling services you can choose from. If you would like to learn more about debt management plans I recommend you read about finding the best credit counseling service from Michael Bovee who founded the Consumer Recovery Network I mentioned above.