I’m in a Debt Settlement Program and I’m Terrified. – Magen


“Dear Steve,

Seven months age-my husband and I signed up with Sierra Financial Solutions-a debt settlement company based out of CA. At the time we signed up-we were in a lot of credit card debt-around $45,000-but we were current on all of our payments-my husband got laid off in Aug 2008 and while we were lucky that he got another job right away-the income was significantly less –we knew that we wouldn’t be able to keep up with even the minimum payments-so we signed up for debt settlement.

We went in with our eyes open-we knew it would have a negative impact on our scores, knew we would receive calls from creditors, etc. but fast forward to now and I’m terrified. All our accounts have been charged off as bad debt. I received a letter from Discover card that they plan on moving my account to an attorney to obtain a judgment against me. At this point, I am just at a loss. We thought that going with debt settlement would be a good thing now we’re not so sure. We have an appointment with a credit counseling service but based upon information I’ve received-I don’t think that that may be the best option for us either.

My question is: Should we continue with the debt settlement company? Or should we back out now and try to talk to the collection agencies and creditors ourselves? We also have a lot of Student Loan debt-around 100,00 between the two of us- which is completely current-we have been paying our student loans all along. We live in an apt and only have a car payment-Is bankruptcy an option? Any guidance you can give would be greatly appreciated.


Dear Magen,

Thank you for contacting me. Here is my take on the situation.

A debt settlement program is not a magic wand. It does sound like you were informed about the issues you would face along the way. One issue about these monthly payment debt settlement programs is that they are frequently front loaded with fees and if you pay in for months and months and then have to bail, all you’ve paid is their fee and all your money is gone, not refundable. I suspect that regulations will be coming in the next couple of years that make that practice, illegal.

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What happens frequently is that since all or most of the initial payments are going to pay the debt settlement agency fee, there is little money saved to actually settle the debt. Creditors get tired of being ignored or waiting so they avail themselves of their legal options and sue.

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None of this is true with lump-sum debt settlements where the money is in-hand, a settlement negotiated and a deal struck, within days or weeks. Back when I was doing debt settlements we would refund the flat fee the client paid if we were unable to negotiate a settlement with the cash we had on-hand from the client. If the creditor did not agree to settle, we would return the money for the settlement and fee paid by the client.

I think we need to take a step back and look at why you went for the debt settlement approach to begin with. At that time you were buried with debt and had suffered a loss of income. You recognized that you would not be able to make the minimum payments, so you sought a solution that would allow you to make your best effort to repay what you could afford to. I see that you were trying to to the right thing based on your situation and circumstances.

But I also think that you may have avoided bankruptcy for how it might make you feel emotionally or your perception of people that go bankrupt. I’d rather see you make a decision based on the facts, all the facts, so you can get the best solution in place.

While you might think that bankruptcy means you are a loser and walking away from your debts, bankruptcy also allows you to repay what you can reasonably afford to under the protection of the court. The minute you go bankrupt your debt goes to 0% interest, fees and charges are eliminated, lawsuits blocked, debt collectors can’t contact you anymore and your monthly payment is based on you monthly income, not what the creditors want or demand.

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I think you need to skip right on past debt management or credit counseling and move straight to a local bankruptcy attorney. This situation has already spiraled way out of control and now is the time to fix it, not patch it.

Let me know what you decide to do.

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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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