Debt Relief Companies

I am approximately 5 months behind in credit card payments. I am trying to pay them, but have found myself over my head and frustrated. My paycheck is too small to beable to pay them. I am looking for other options but have not found one. My credit score is low because of not being able to pay on time. I have creditors calling and don’t know what to do. I tried looking into a credit counselor, but they told me they cannot help me because I dont make enough to even begin to consolidate. They gave me one option, file for bankruptcy. I don’t want to file for it makes it harder to even fix your credit problems. It is like a dead end for a long duration of time. Do you have any suggestions?

Scott — Fri, 05 Jun 2009 18:24:37 +0000

Unfortunately, your situation typifies what millions of people are now facing in terms of their debt problem. In short, not enough income to pay it back even with the careful budget planning of a debt management program offered by credit counseling agencies.

So what options does that leave you?

1. Debt settlement program - Will typically be able to reduce your payment much more than you are able to in a debt management program

2. Bankruptcy

However, as you mention, both these options will not preserve your credit score. The only way I know of that will get you out of debt and still preserve your credit score is to pay back everything you owe. Unless you can get a lower cost loan (unlikely these days), then I hate to say there is no magic solution. A badly damaged credit score is often the sacrifice many people are forced to make to get out of debt because all too often there is no other way around it.

Sorry I don’t have a better option for you. I wish you the best.

I have been talking to two different debt relief companies with 2 largely 2 different payment plans. Just wondering if the one is too good to be true. one company has plan to pay the principal without the interest, while the other has plan to pay whatever deductied amount the credit co. will agree too( that is the cheaper payment option for me). I have been trying to check out the companies and have been unsuccessful. Any suggestions?

Scott — Thu, 21 May 2009 18:13:33 +0000

It may be that you are speaking with 2 different types of debt relief companies. From what I can gather from your description (and without knowing more) you may be getting a quote from a debt management company (the first one) and a debt settlement company (the second one).

These are 2 very different types of solutions and it’s important that you understand the differences before making a decision. My suggestion to you is to watch my debt relief video here to learn more (and please pardon my poor video production skills:).

I hope that helps.

If a company takes the 15% fee up front within the first 12-18 months from your escrow account which basically leaves nothing in there by the time of settlement. Does that sound right to you?

Scott — Wed, 13 May 2009 13:16:21 +0000

15% is the standard fee in the industry and yes some companies do try and collect that within the first 18 months or so. However, the thing that confuses me about your question is the statement that nothing would be left at that point in escrow (your trust account). Certainly the company you are working with should start settling debts much sooner than the 18 month mark, within the first 12 months. So no, you should not have zero money left in your account if the company takes it’s fees in the first 12-18 months without some accounts having been settled already. Sounds odd to me.

We are currently in talks with a debt reduction company. They are claiming that they can reduce our debt by 50%, but for the next two years our credit score will suffer and we will be hassled b creditors. Is this a viable option to get out of debt as quickly as possible?

Scott — Fri, 08 May 2009 16:11:10 +0000

If you want to get out of debt as quickly as possible, debt reduction through a debt settlement company is often the route many people take. There are never any guarantees in the debt settlement process but it is possible to reduce the amount you owe by 50% (sometimes more). The drawbacks they mention are also true but I would say the following:

1. Yes, you will likely still get calls from creditors
2. I would say that your credit score will likely be damaged for longer than the 2 years they cite. Every situation is different but understand that the settlement process entails you ceasing to pay your bills for a period of time and that will have a lasting impact on your credit score. It will likely take longer than 2 years for your credit to recover.

In short, setttlement is a relatively quick way (still years) to get out of debt and for many people it’s their only option other than bankruptcy. But please understand that there are drawbacks and be careful with companies that play those down just to get you in the door.

I read a question from someone about the BBB rating of a debt company, what are some other ratings, there are other ratings called TASC and International Assoc. of Professional Debt Arbitrators? Are these good associations to judge a company by?

Scott — Mon, 30 Mar 2009 00:01:31 +0000

Basically there is no rating system that’s adequate to help you select a debt relief company. The BBB is good in my opinion not for its letter rating but instead for knowing the number of complaints against a company over the past 3 years and how many of those have been resolved. Unfortunately they do not tell you the most important statistic which is the size of the company. A company with 20 complaints and only 500 clients is not good but a company with 20 complaints but who has 5000 clients is an acceptable percentage in my opinion. If you do not know the size of the companies you are comparing you may be comparing apples and oranges.

The trade associations you mention are good and helpful but don’t just pick a company because it says it belongs to any particular association. It is only one of many factors to consider. There is no one single rating you can go by. It’s all a matter of educating yourself about the process as much as possible and then interviewing some companies to find the ones who give you straightforward answers….about the positives AND the negatives of professional debt relief (remember there is no such thing as a free lunch, right?).

Ask hard questions, research the answers you get, and determine who is being upfront with you. To me that’s the best way to find an honest company. This site has hundreds of pages of questions and answers to help you.

If you sign up with a “so-called law firm” that handles these debt negotiation programs, how do you know that your credit card co. is even for sure going to settle with them???

Scott — Sun, 22 Mar 2009 17:38:50 +0000

There are no guarantees with any negotiation process and that’s the case as well with debt settlement. A reputable settlement company or law firm will closely evaluate your situation before they take you on as a client to be sure that your creditors are ones they’ve had positive outcomes with in prior negotiations. A settlement company that doesn’t closely evaluate your creditor situation before accepting you is one to be cautious of as they may over-promise and under-deliver leaving you with their bill and no settlements.

That’s why it’s so important to deal with a company that is very upfront and honest with you from the initial conversation. You want to hear the positives AND the negatives from the representative you are speaking with. If they are hiding the negatives, be careful.

Remember, like anything, if it sounds too good to be true, it probably is.

I am $42,000 in credit card debt. I pay about $1100/month in credit card payments. Most of these are just minimum payments. My paycheck is mainly to pay off these cards where my husband pays everything else. We have recently put the house on the market to pay these off, but the market is so bad, we really can’t count on the money from the house. Not enough equity in the house either for a home equity loan. I have considered debt negotiation, but is that the route you would suggest?

Scott — Mon, 16 Mar 2009 16:32:09 +0000

Debt negotiation (settlement) is intended for those who:
1. Have more debt than they can realistically pay down on thier own
2. Have no other means of selling assets to pay down their debt (like you are trying to do)
3. Have already tightened their family budget as much as they can (bare bones expenses)
4. Do not realistically see their income increasing enough to compensate for the growing debt
5. Are being forced to consider bankruptcy but want to review alternatives as well
6. Are unable to borrow at a lower interest rate to pay off the high interest credit card debt
7. Have so much debt vs. income that even a low interest rate will not bring the monthly payments down enough to make a dent in the principle balance

If that describes you then, yes, certainly you may want to learn more about the debt negotiation process (the good and the bad) so you can make an informed decision.

I hope the information on this site can help you….good luck.

HI SCOTT: My wife and I both got divorced from our former spouses in the early 80’s, sold our houses and bought a new house together in 1997. All 6 kids have graduated from high school and 5 have graduated from college. Our divorces created…(cont.)

Scott — Sat, 07 Mar 2009 19:30:37 +0000

Question Continued…financial hardships on both of us that resulted in credit card debt. When we bought the house in 1997 we paid off all credit card debt from the equity of our houses and had enough left over to put money down on the new house. We kept using credit cards to pay for unexpected expenses and the many additional costs associated with putting kids through college. We had no significant savings. Periodically we would refinance our mortgage to a better rate and for a greater amount, as the house had significantly appreciated in value, and each time we would pay off the credit cards. The last time we refinanced, we did so with a 5-in-1 ARM, because had had decided to move in to a smaller house once all the kids were out on their own. Following the housing market, and having our house appraised by banks and several different realtors, we were assured that we had approximately $150K of equity when it came time to sell the house. Then, unexpectedly by all, the housing market crashed and the significant number of foreclosures in our area brought the value of our house down. We ended up selling our house for $170K less than what the consensus of realtors had told us to list the house for. We had to sell it because we would not be able to afford the increased payments when the 5-in-1 ARM ran out. That left us with over $90K of unsecured credit card debt and no house. We have been able to make minimum payments using the little bit of savings we had, but our savings are now gone and can no longer keep up. How can we get out from this predicament?

Answer: Sorry to hear your story and unfortunately you are not alone in your situation which sounds like it was largely caused by the aggressive tactics of the mortgage industry before the current real estate bust. The 2 types of debt relief are debt management or debt settlement. I suggest you review both options on this site to help you determine the one you think may be best for your situation.

Probably the easiest way for you to learn is by watching my video which I think does a good job of explaining the 2 options. You can watch my debt relief video here.

We did a short sell 3 years ago and then mortgage co. financed the remainder. We paid on for 3 years at $210/mo and paid on time. Rec’d letter last August from mort. co. stating “exciting opportunity”, send us a money order or wire within 14 days and we’ll waive 90% (cont…)

Scott — Fri, 27 Feb 2009 02:09:21 +0000

Question continued…: of your balance or pay within 20 day’s and we’ll waive 80% and then warned there may be a “tax event”. We wired the money and stated on the wire that this satisfied our loan and also stated the same thing on our fax when we accepted their offer. We were turned down for a mortgage today because they reported on credit bureau “legally paid in full for less than the balance.” Before we sent money we asked them if it would effect our credit and they said no. We also asked them about the “tax event” and they said it didn’t pertain to our loan. We got a 1099 for $13,000 anyway. Is it legal for them to send us a letter o ffering us such an “exciting opportunity” when we weren’t late with our payments and had been paying on this loan for 3 years? We didn’t ask for “debt relief” and since me make over $170K/year had no problems making $210/mo in payments. Now we’re screwed for 7 years and can’t buy a home and this “exciting opportunity” only saved us 5K after taxes. We have all our paperwork, even letter about “exciting opportunity.” The mortgage co. wouldn’t discuss with me and tell me we have a “charge-off” account. Is there anything we can do about this…misrepresentation is how we feel.

Answer: I am sorry to hear this story as it sounds like an example of all the mortgage deception that went on all too frequently over the past few years. Having said that it sounds like you should consult a lawyer to discuss it with them. A lawyer will let you know what recourse you may have if any. Sorry I cannot advise you on that but it really is a mortgage related legal matter. I wish you the best.

My husband is self-employed and I’m not working. So far we’ve been able to pay our bills, but he only has a week left with the company he has been sub-contracting for. I have $40,000 in a 401k which is our only savings left. We have $55,000 in combined credit card debt. My mortgage is a neg am fixed at 6.50 with 2 years left, but I can only afford to make min payment, so $20,000 has been added to the original principal balance of $500,000. We won’t qualify on a full doc loan to refinance. I have a free and clear rental in Nevada, but would take too much money to fix up and sell and would rather wait until market is better. How do I reduce credit card debt and modify my mtg if we aren’t late and can’t qualify?

Scott — Thu, 12 Feb 2009 15:35:28 +0000

I am not sure why you do not think you can qualify for debt settlement or even a possible mortgage modification. As part of the debt settlement process, you will fall behind and stop paying your credit card bills as you save up the money so debt negotiations can begin. This is the reason why credit scores get badly damaged during debt settlement, because it requires you to stop paying your bills. It is the cost of paying back less than you owe but it may get you out of debt if your options are few given your income situation.

Getting a home loan modification is also a negotiation process and something you can look into seperately from the credit card settlement process. As you mention it may not be possible but remember, banks are so overwhelmed by foreclosures that many are more willing to help you remain in your home if at all possible.

My suggestion to you is to learn as much as you can about your options on this site and others. Then talk to a few debt relief companies to get a better sense of what they offer. Make sure you understand (and discuss with them) both the benefits and drawbacks to their programs as there is no free lunch in getting out of debt. Anyone that doesn’t discuss the drawbacks with you is a red flag in my opinion.

I have 18k in debt…

Scott — Fri, 06 Feb 2009 21:49:01 +0000

(a total of 3 credit cards, one a business credit card and the other 2 personal credit cards). I’m self-employed. I live in Texas and was hit hard by Hurricane Ike. As a result (cont…)my business suffered, I have little to no income and I’m now drawing unemployment which is barely enough for necessities. I’ve been unable to pay my credit cards debts however up until the point, I had perfect paying history. My 3 credit card companies deffered my payments for three months. As of December I had to make payments but my financial situation hasn’t gotten any better. With the help of families I’ve been making payments, but it’s frustrating because I made one payment of $300 and $222 went towards interest. Payments went up from $300 to $366 per month with no explanation. When I called to inquired aand told that I could only ppay the $300 and not the aaddtional $66, unknowingly to me they transferred me over to some kind of credit source. I thought they were working with me, but as I was giving them info on my financial situation, they were lowing all of my credit card limits. They told me that they were trying to help me. I asked them not to lower it and that I would figure out a way to come up with the money. I didn’t want to damage my credit score, they told me that it was too late and that they had just lowered my limit. Another card who deferred my payment, reported me to the credit bureau and told me that it was a mistake, but did nothing to rectify it. I want to pay off all of my debt, but I feel that the card companies are working against me and I see know way of getting out from under this debt. The ironic thing is that the one of the companies who has been unfair to me was one of the banks who the Government bailed out, but they’re coming after consumers violently.

I’m considering Debt settlement to try and rectify it and pay the $500 monthly to the debt settlement, they’re telling me for about $18 months at $450 per month. I can do this. By the way I just got a job but not at a salary that will allow me to pay off the cards with the interest rate and unfair tackets that they’re using. After reading your information I’m having second thoughts and thinking that maybe I should come up with another plan.

This is my question:

I understand that I will still be accumulating interest and late fees on cards during the debt settlement process.

If I go to a debt settlement co. with a card debt of 15k and durting the settlement process I accumulate an addtional 5k with interest and late fees, will I be responsible for settling 20k now instead of 15k?

If so, pay the settlement co a total of $8k, their cut is $2k and the cards or settled for a total of $6k, is my settlement considered to be $6k and not $8k? So do i pay irs taxes on the $20k minus the $8k or the $20k minuse the $6k? i.e. am I now responsible for $20k instead of $15k in debt?

What would I owe to irs? Taxes on $15k minus the $6k that the credit cards actually settled for ($9k) or $15k minus the $8k which I actually paid ($7k).

Or would I be responsible for paying taxes on the accumulated fees and interest which would be $20k minus the $6k ($14K) or $20k minus the $8k ($12k)?

I want to do what’s morally right and what’s right in the sight of God, but it’s more than I can handle. Do I stay in debt the rest of my life because because of a natural disaster that I had no control over?

I’m thinking that even with paying taxes it would stop interest and give me some relief. Maybe I can just save for the taxes. Please enlighten me on what I amount I would be responsible for paying taxes on?

P.S. The Credit Card companies/banks who issue the cards where unfair to a lot of people after Ike. I know a lot of people who were self-employed and are dealing with the same issues with card companies.

ANSWER: Thanks for the detailed question….The bottom line is that you will pay taxes on the debt amount that is forgiven by the credit card companies. I am not an accountant so you would want to get an official answer on this but my understanding is that the fees you’d pay to the settlement company would not count.

So if the credit card company settles 18 months from now and at that time you owe $20K but settle for only $9K and pay the settlement company $3K to handle your case, then you’d owe taxes on the $20K-$9K=$11K. That represents (in the IRS’s eyes anyway the amount you “saved” and therefore would likely be treated as income.

A good debt settlement company should be able to assist you and help you prepare for any tax bill you might have so you have savings for it.

I hope that helps.

Please explain how the $$$ saved can be taxable when it is not income? If I owe $50,000 and settle for $25,000, how can they tax the 25,000 saved when I have not claimed the 50,000 as an expense? What am I missing?

Scott — Fri, 06 Feb 2009 03:27:25 +0000

This is a great question and yes your logic is 100% correct however, the IRS rules say differently. The define the settlement savings as income and so they tax it. It’s unbelievable and unfortunate but true. I can only hope that the new Obama administration will review this because the number of people who are settling debts these days is tremendous.

Why Can’t Debt Settlement Companies Tell You Exactly How Long Their Program Will Last?

Scott — Thu, 15 Jan 2009 02:19:00 +0000

Debt settlement is a negotiation process and until an agreement is reached between the debt settlement company you hire to work for you and your creditors, nobody knows exactly how much you will end up paying. Typically the company puts you on a payment plan that will last no more than 36 months however if they are able to reach agreements with your creditors in less than 30 months (which they are saying is likely) then you would be done earlier than the 36 months and would no longer make the monthly payment.

A Simplified Example:

Say you have exactly $30K in debt and $10,000 is with credit card company “A” and $20,000 with credit card company “B”

Say your monthly payment they quoted you is $500 (I have no idea…just as an example)

You’d pay $500 to your settlement company every month

At the end of 12 months, you would have paid the settlement company $6,000

You settlement company believes that credit card company “A” may accept $6,000 or less instead of the $10,000 you owe as a settlement

They then begin to negotiate with company “A”

A settlement is reached where company “A” accepts only $5,000 and that is taken from the account you have with the settlement company

So there is $1,000 left in you settlement company account and you are still paying $500 per month to save money until you have enough to negotiate with co. “B”

So to sum it up, because it is a negotiation that takes place only after you have saved up enough money (since credit card companies A and B will want to be paid immediately after the settlement is reached), no one can tell you exactly how much you will end up paying. They can only make an educated guess based on their prior experience with your creditors and other clients which is what they use to quote your monthly payment figure.

While making my monthly payments to the debt settlement, will my balances still be open on my credit cards that are part of the settlement, and thus have interests and fees accruing on them still?

Scott — Mon, 05 Jan 2009 04:00:42 +0000

Yes, you will still be accumulating interest and late fees on your cards during the debt settlement process. By “process” I mean the time during which you are making monthly payments into a trust account that will be used to eventually negotiate the settlement rather than paying your credit card bills like you normally would (or should). During this period your accounts go into default which is what results in the damaged credit score.

Note that the debt settlement is a negotiated amount between you and your creditor that will be agreed to once your trust account has accumulated sufficient funds as determined by your debt settlement company. This negotiated amount will include all the late fees, penalties, accrued interest, etc. that has accumulated. So yes, the fees will add up but once a settlement is reached, it will include everything that you owe and your account will be closed.

The only cost in addition to the settlement that you need to beware of is the tax bill from the IRS on the amount you “saved” as they view that as taxable income (crazy, I know). Your debt settlement company should make you aware of this upfront and help you save for the tax bill as well.

My question is: what is the difference between companies that say they can provide no legal help if you are sued by the creditors, those that say they can tell you what you need to do if this happens, and those that guarantee (because they are a “legal firm”)you will be protected from legal action by their legal expertise in these matters? I really appreciate a response. Also, which organizations, i.e. TASC, etc. are really a valid gage for knowing if a company is legit? THANK YOU!!

Scott — Fri, 19 Dec 2008 23:16:05 +0000

Lawsuits are relatively rare but they certainly can and do happen. A reputable firm will not take on clients who they deem to be at high risk for a lawsuit either because of who their creditors are or in those cases when a consumer has the income to repay their debts but they are blatantly trying to avoid it. Having said that, anyone who guarantees you are protected from a lawsuit should be avoided and any company with thousands of clients will have the experience and knowledge to guide you through anything that might come up. Why? They most likely have seen it before and they should have established relationships with all the major creditors. Relationships matter!

TASC and USOBA are the two primary trade organizations for the debt settlement industry. Both are fine but I believe one should not just base their decision on a company’s membership with any trade organization. Some companies who are members of any trade organization in any industry will be better than others so you need to carefully interview a few companies and find one you feel the most comfortable with.

Hey:Scott. Nationwide assets.also known as Global solutions.

Scott — Fri, 19 Dec 2008 22:59:37 +0000

I am sorry but I am not familiar with this company. Sorry about that.

I have 20k in cc debt. I have never missed a payment and have a relatively good credit score. However, my student loans which I can no longer defer need to be paid starting in three months. I can’t afford to pay both so I’m trying to find a solution before then to relieve my debt. I signed up for a debt settlement program for my credit cards a week ago but now I’m having second thoughts after reading your Q&A’s about the severe effect on my credit score. I was looking for the fastest way to get out of the cc debt so I can only worry about my student loans. Not sure what I should do. Suggestions?

Scott — Wed, 17 Dec 2008 20:27:11 +0000

Unfortunately, I do not have a good answer for you. If you have both types of debts you cannot consolidate them into a debt settlement or management program so they must be handled separately. If you cannot pay both and cannot find the money you need from some source other than your income (maybe a loan from a relative?) or a much tighter budget, then you may need to make some serious sacrifices.

I understand your concerns about debt settlement and they are valid but if there is no way to come up with the money you need as mentioned above, then you may need to consider it or even possible bankruptcy. One other option is to look into a debt management program but that just reduces your interest rates on your credit card debts and may not provide the monthly payment relief you need. However, it is certainly something you should look into. I wish you the best.

I owed about $2000 on a credit card I had back in college now they are coming back and they want for me to pay them $6000 or that they are pressing a lawsuit against me. I don’t have much money because I have a premature baby that is sick and needs medical attention, but I do want to settle this account that has been bothering me because it just adds to my stress is there something I can do. My overall debt that is in collection is about 10,000 not including my student loans which are in forebearance and my car which I pay on a monthly basis. I want to look at consolidating companies, but from reading several reports it seems that you need to have a lot of debt in order for it to be worth it. What should I do? Is there a way to stop a lawsuit from happening? Where should I start? sorry for the long questions :-) but I am desperate for answers.

Scott — Tue, 16 Dec 2008 15:58:59 +0000

It sounds like you have several types of debts which can pose a problem. The student loan debt is something that debt consolidating companies offering debt management or debt settlement solutions cannot assist you with. In terms of your credit card debt, however, you are correct that the amount is too small for a debt settlement program to make sense. That leaves you with the debt management program option which will help you consolidate your credit card bills and lower your interest rates.

This can provide some monthly payment relief but you will have to decide if it is enough for you as your debt balance will still not be reduced. I would start by speaking with some credit counseling agencies to get a payment quote or two to see if you can squeeze it into your budget. The alternative is that your debts continue to grow which may force you into a more difficult situation down the road.

I wish you and your baby the best.

I have a good credit but my income has decreased. My credit cards rate are excellent 3.99 % and 6.99% but the balance are high (50K). Can I protect my credit score and drastically reduce my debt payments, or since the rates are very good banks can’t go lower? Will a debt management program or credit counseling agency help me to reduce my payment . It is a way to get the rates I’m paying lowered?

Scott — Fri, 12 Dec 2008 20:40:45 +0000

It sounds like your interest rates are already exceptionally low so a debt management plan would not do you any good. A debt settlement program can help you reduce your balances but will also damage your credit score which sounds like is something you are reluctant to do.

Since your rates are already so low, you should try and find a way to pay down the debt yourself. If the payments are still too high then you have gotten yourself into a situation you may not be able to get out of on your own. It is only at that point (if that’s the case) that you may need to consider settlement or bankruptcy.

There is no way to reduce your credit card debt balances without the credit score damage you are concerned about when using a professional debt relief program. Sorry I don’t have better news for you.

When entering a debt settlement program, and start paying the debt settlement company and stop paying creditors, will they start harrasing you, or do you consult first with the creditors so they know what is going on?

Scott — Fri, 12 Dec 2008 20:24:48 +0000

As you mention, the process of debt settlement entails a suspension of payments to your creditors while you accumulate money in a special purpose account. This account will stockpile the funds until you have enough money for your settlement company to start the negotiation process with your creditors. During this time when you stop paying the creditors they have a right to continue to contact you for repayment within the established collection laws, however, a good debt settlement company will often be able to reduce the volume of calls…but there are no guarantees.

How?

Once your creditors become aware you’ve entered a settlement program (as notified by your settlement company), they often will deal directly with them. This is often due to the relationships that a large setlement company already has with the large creditors. However, there are no guarantees that calls will go away and if a settlement company that tells you as such, that is a big red flag.

Each creditor is different as to how they proceed with consumers who owe them outstanding balances. Furthermore, the call volume you recieve depends on what company is doing the collections. Is it the creditor themselves or have they hired an outside collection agency to work on your account? There are many variables so there is no clear cut answer.