10 Jan 2018

Is a Settlement Program Ever a Good Idea?

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Is it ever a good idea to try to solve your debt problems with a settlement program? Is debt settlement worth it?

Disclaimer: I am not a lawyer nor am I a consumer credit counselor. I am simply sharing some information about credit and money which I feel may be of value. It is your responsibility to perform your own research and make your own decisions.

The settlement program is not for the faint of heart. It is probably better than bankruptcy, although that is debatable, but it will be rough on your psyche and will have long-term effects on your credit history and your ability to get credit. There are a few “gotcha’s” that you will definitely need to be concerned with before deciding to venture down this road.

What is a Settlement Program?

In a settlement program, you refuse to pay the debts until and unless your creditors offer settlement terms that are generous. Given a good negotiator, you can wind up paying anywhere from 20% to 80% of the remaining balance of each card. On the surface, this appears to save you a significant amount of money. Beware, however: there are severe drawbacks to this method that you must be aware of before embarking on such a torturous plan.

Some facts about a settlement program:

  • It only works with unsecured debt
  • It will destroy your ability to obtain credit for several years
  • The “forgiven” amount of any settled account is taxable income
  • You have to stop paying the cards for at least 90 days before you can even begin the program
  • Some creditors will not offer settlements and will instead simply take you to court
  • Be very aware of and thoroughly understand your rights and responsibilities as a debtor

With a settlement program you are basically playing a game of poker. You need to know when to place your bets (figuratively), when to call and when to fold. Alternately, I would highly recommend that if you choose this route you engage the services of a consumer counseling firm that can do the legwork for you. At the very least, they will be able to tell you which creditors play the settlement game and which do not.

Let’s take a simple example so you can see how this works. Let’s say you have a couple of credit cards, each with two thousand dollars.

The first thing you will want to do is engage the services of a professional to do the negotiating for you. Otherwise, you will receive all of the harassing calls from the creditors, as well as the letters and notices which beg, plead and threaten you regarding the amount you owe. Unless you really like playing that game, you’d be best to let someone else take the heat.

That professional service will ask you to sign a limited power of attorney, which gives them authority to negotiate for you on those accounts. You will need to send a letter and a copy of the signed power of attorney to each creditor.

You will need to stop paying anything on any of the cards in the settlement program. It will take at least 90 days and possibly as long as six months for creditors to even begin to consider settlement offers.

The counseling firm will also charge a fee, generally up front, for this service. They will make it clear how they are to be paid. Be sure you understand exactly what they are charging, why they are charging it and how it is to be paid.

Another requirement is that you build up a savings account (or some other fund) that will be used to pay the creditors when you settle. You will need to keep the counseling firm informed on a regular basis as to how much money you have in this fund. This will enable them to know when and with whom to settle.

During this time you will receive the normal demanding phone calls and letters from your creditors. It is highly recommended to keep good records of all letters and calls. At every chance, refer them to your consumer counseling agent. Be polite and be firm. Do not accept any offers to pay or make payments or anything like that. This obviates the possibility of settlement.

You may (probably will) receive threats of lawsuits. Forward these to your agent and discuss with them as needed. They agent should be able to advice you, based upon past experience, which creditors are serious about this and which are not.

After some time has passed, creditors will start to offer settlement packages. These will begin relatively low, in the 80% of the balance range, but will get higher as time goes by. This is where the experience of your agent comes into play: he will know, from dealing with these creditors in the past, how low they will go.

The creditor for a debt may change through this procedure. Do not worry – it is common for loans to be sold and sold again as you go through this process. What’s happening here is a creditor may decide to sell the loan for some percentage, say 25 cents on the dollar, to get the money immediately. The new creditor will then own the loan and will take over the attempts to collect. This does not in any way lessen your responsibilities, but the new creditor may be easier (or harder) to settle with than the old one. This will be obvious when you get a credit report, as it will be reported twice (or more if it’s been sold again).

Sometimes a creditor doesn’t sell the loan. Instead, they pay an agency to collect for them. Thus, it might appear that the loan has changed hands, but it really hasn’t.

At some point a creditor will offer you an attractive settlement offer. Your agent should be able to guide you in whether or not to accept the offer, and, of course, the amount of money in your fund (savings or otherwise) and possibly other available cash will factor in the decision to accept or not.

The counseling agent will generally get the creditor in the phone to talk with you. Note this is often very time sensitive. This may be a three-way (or more) call. The agent will introduce you to the creditor, who will lay out the terms of the settlement.

You will be expected to pay the full amount within a short period, usually a few days to a week, directly to the creditor. Sometimes a creditor will allow two or three large payments within a specified time frame.

After listening to the terms, you are expected to agree (hopefully the agent has already filled you in on the terms and this won’t be a surprise to you). You may or may not be asked to sign an agreement. You should not even get into the call if for some reason you cannot make the payment.

Now you simply fulfill what you promised and the debt is settled (hence the name “settlement program”). This will change the notation for this creditor on your credit report from “unpaid charge off” to “paid charge off” which, while serious, is not as bad a black mark. Also, that creditor will stop harassing you for payment.

This process will repeat for each creditor.

A settlement program can take quite some time to run its course, so be patient. The more money you can put into the plan (generally a savings account) the quicker the program will run.

Disadvantage of a Settlement Program

Now for a huge caution. The consumer creditor agencies bury this in their fine print, but it’s critical for you to understand a major shortcoming of the settlement plan.

Any settled debt is immediately taxable in the year it was settled.

Thus, if you have a $20,000 debt which you settle for $2,000 (10%) don’t be overjoyed yet. You will owe tax on $18,000 in the current year, and it counts as income. If you are not aware of this, you might find yourself with a huge, nasty surprise at the end of the tax year.

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