Should I File for Bankruptcy?
Learn how you should file for personal bankruptcy when you can’t afford debt and other relief options won’t help.
Learn how to use debt settlement to strategically eliminate credit card debt
You’ve probably heard the radio ads or seem TV ads that offer to settle your debt “for pennies on the dollar.” These ads make some pretty unbelievable claims, but that one is actually fairly accurate.
According to recent statistics, the average debt settlement client pays 48% of the balance settled. So, pennies for the dollar effectively means 48 cents per dollar. If you owe $50,000 then you would pay about $24,000 to settle your debts.
The other big claim that you hear in those commercials is that settlement is a solution that your creditors don’t want you to know about. It’s basically the hook that you’ve just discovered some super-secret magic cure that creditors were actively trying to hide from consumers.
That’s mostly hot air. Creditors are not hiding debt settlement. They’d probably prefer that you don’t use it, because they want you to pay them what you owe. If you ask them, they’d probably recommend things like debt consolidation or credit counseling because they get their money back.
But for the record, in most cases when you settle a debt, you’re not working with the original creditor anyway. You usually settle with debt collectors. That means the original creditor already wrote the debt off as a loss (known as a charge off). Collectors very rarely get paid in full and are usually willing to take settlement offers to make any return on the debt they bought.
If your debts haven’t been charged off yet and you haven’t even started to miss payments yet, don’t use settlement! In order to generate the funds necessary for a settlement offer, the company will tell you to stop paying your creditors. Instead, you send the money to them to generate the funds for your offer.
This means your accounts in good standing will fall into default and then to charge off. You effectively make you situation much worse before it gets any better. And there are other solutions that you should try first that won’t damage your credit. Settlement may allow you to get out of debt for less money, but the credit damage can be heinous. So, you should only consider settlement once your situation is bad enough that credit damage is the least of your concerns.
If a settlement company requires that you pay them anything before they settle at least one debt, it’s a scam. Prior to the 2010 FTC regulation, this is how shady people made a quick buck off your desperation. They would prey on your desire for a quick resolution, charge as much as possible, and then run with your money.
The advance fee ban prohibits a company from collecting any fees until they settle at least one debt for you. If the company settles multiple debts for you, fees may only apply for each debt settled at a time.
Some companies also build the fees into their payment structure. So, when you pay them each month, they take out some money for fees. This is usually kept in a separate fund that isn’t touched until they earn the fee. For this structure to be done legitimately, they must offer a money-back guarantee that if they can’t settle any debt for you, you get your money back.
If you’re thinking of using debt settlement to avoid the credit damage caused by bankruptcy, you might want to reconsider. Anytime you settle a debt, it creates a negative item in your credit report. This item remains for seven years from the date of discharge – that’s the day they zero out your remaining balance after you pay the settlement.
That seven-year timeclock is the exact length of a Chapter 13 bankruptcy penalty. So, both penalties would expire at the exact same time. That being said, settlement may result in a less harsh penalty than filing for bankruptcy. However, both will almost certainly drive you into the subprime credit score range.
Anything that’s not government-backed or attached to collateral can usually be settled once the creditor gets tired of trying to get paid back in-full. Payday loans and medical bills can often be settled directly with the collection agency, without going through a settlement program.
Student loans (private and federal) cannot be discharged by bankruptcy. As such, there is very little reason for student loan servicers to accept settlement offers. They also don’t charge-off defaulted loans and send them to collectors, even in the private sector. So again, there’s few paths available that lead to settlement.
Mortgage and auto loans can’t be settled unless you are willing to give up the property. “Settling” a mortgage is effectively what you do when you complete a short sale. However, there is no guarantee that the lender won’t seek a deficiency judgment; that’s when they sue you for the remaining balance on your mortgage after a short sale.
The only other type of debt where settlement is even really a possibility is tax debt. The IRS does allow tax debt settlement through what’s known as an Offer in Compromise. They agree to accept a portion of what you owe if there is not reasonable expectation that you can pay back everything you owe.
This is rare and involved to reach. You essentially have to show the IRS everything about your finances. They leave no stone unturned to try and get paid. And during the OIC review, they make sure they figure out exactly how much you can reasonably afford to give them.