Dec. 15, 2008 -- There's no escaping it. Americans are in debt. Heck, our auto industry has so much debt, the Big Three worry about making it through another quarter. Even our government is going deeper into debt as it tries to shore up everybody else's bad loans. So the following letter from a viewer seemed like a fitting subject for this week's column.
We have A LOT of credit card debt. And it's spread over five cards. What are your thoughts about calling the companies and offering a lower amount to settle the debt? I've gotten advice from two people and they were very different.
I didn't feel fully confident answering this viewer's question myself, so I consulted with my buddy Todd Mark, vice president of education for the Consumer Credit Counseling Service of Greater Dallas. Mark is passionate about helping people live debt-free. And CCCS is the venerable old non-profit that I am always steering people to if they are deep in debt. (Call (800) 388-2227 or go to www.nfcc.org to find the Consumer Credit Counseling Service nearest you.)
Like so many things, Mark says the answer to the viewer's question is, "It depends."
He wanted to know: "Would a debt negotiation/settlement or even a bankruptcy filing truly position them to survive any financial crisis, and live within their means and accomplish financial goals going forward? Or would it only temporarily ease the burden, while masking any underlying behaviors and enabling the chance to immediately start a new debt cycle?"
In other words, I think Mark is trying to say that debt settlement is a step you should take only if it is going to have a permanent cleansing effect that sets you up well for the future.
Mark points out that when you negotiate with your creditors to pay a lower amount than you owe, there is an immediate and marked impact on your credit rating. The creditors "charge off" the amounts they forgive, which means they report that amount to the credit bureaus as an unpaid debt, a loss.
"That will stain a credit report for seven years," Mark explained.
Credit Settlement: Credit Report, Fees and Bankruptcy
Mark also alerted me to the fact that many companies that help people negotiate debt settlements charge high fees or collect a percentage of the amount they get your creditors to forgive. In other words, money that could be going toward your debts is going to them instead.
"Bad actors in the industry will collect fees up front, while paying nothing for months, destroying the client's credit under the guise of building leverage for the negotiation, " he warned.
Debt settlement is "the road less traveled" and, as such, can be a bumpy ride. You may actually be better off declaring bankruptcy, a well-charted course governed by the courts. Keep in mind bankruptcies also remain on your credit report for seven years.
Whatever you do, don't make a move without expert help. Correction: expert NON-PROFIT help. For-profit credit counselors have been known to keep your money instead of forwarding it along to your creditors as they have promised. Non-profits like Consumer Credit Counseling Service look beyond your present debt to life changes you can make to break bad habits and avoid falling into the same cycle again and again.
Here's how Todd Mark describes the CCCS process: "A caring counselor will review your full monthly spending plan, evaluate the reasons for any debts, mortgage delinquencies or financial crisis, consider all options, and develop an action plan [increasing income, decreasing expenses, paying down debts, changing lifestyle or setting financial goals] that the client can execute on their own."
In the end, paying off debt is a lot like losing weight. There are no miracle cures. Just as you need to exercise more and eat less, you need to pay off more and spend less to build a healthy financial future.