New York Times on Debt Settlement: Another Perspective

An article today in the New York Times warned about the perils of debt settlement, and a number of comments were posted in response. I’d like to add mine.

As a consumer educator for 22 years, I first shuddered when I heard about debt settlement. In fact, I recall writing an article about ten years ago where I said it was quite possibly the worst idea ever...Don’t pay your debts? Let them go delinquent? How could that ever help you solve a debt problem?

Unfortunately, though, I’ve had to change my tune. I am still opposed to the approach that many settlement companies are taking where they charge high upfront fees regardless of whether they help consumers, and I appreciate the warning about them in the article. But I don’t rule out settlement all together as a legitimate option for some consumers who are buried in bills.

Debt settlement has become popular because while consumer debt has increased, options for resolving that debt have contracted. Bankruptcy has become more difficult for some people to file, as Ben describes in his comments on the New York Times article. And credit counseling typically requires debtors to pay back 100% of their debt plus interest, often at double-digit rates. That simply doesn’t provide enough relief for them to dig themselves out from debt.

(Fortunately, new payment plan terms agreed to by the National Foundation for Consumer Credit and top creditors will allow more people to pay off their debts through reduced payments in a Debt Management Plan. This should make counseling a better option for more consumers. I’ll write about that in a separate post.)

In addition, most people I talk with have absolutely no desire to file for bankruptcy. They want to pay their debts back, but they cannot pay the full amount. They, too, often turn to settlement as a way out.

In an ideal world, borrowers should be able to negotiate directly with their creditors. However, when someone owes multiple creditors (as most people do when they are deeply in debt), each creditor will do its best to be at the top of the pile. The stress and pressure that causes can be impossible to handle for someone who is already struggling financially. I’ve spoken to people who are trying to pay as much as they can, but the calls are so constant that they fear they will lose their jobs. Others are suicidal. It only takes one creditor who is especially aggressive to push a borrower over the edge.

In writing my new e-book Reduce Debt, Reduce Stress, I interviewed several debtors who successfully completed settlement programs and were thankful that option was available to them because it allowed them to avoid bankruptcy. (Each owed too much to be able to complete a credit counseling program.)

In a comment on the article, Sudhir recommends that consumers check with the Better Business Bureau before choosing a settlement company. Unfortunately, however, the BBB does not recognize settlement companies as legitimate options and does not provide top ratings for settlement companies, even if they generate no complaints (and pay the membership fee).

However, I agree that consumers must be extremely cautious about choosing a settlement company to work with. These programs are not painless. Your credit will be ruined for a while because you stop paying, you could be sued, and there can be tax implications. Hang up on any company that makes settlement sound like an “easy, guaranteed” program to pay off your debt. You can read my Fourteen Questions to Ask a Settlement Company and use them to help you choose the right settlement partner.

And I also strongly recommend talking with a credit counseling agency to find out whether that may be the right option. Even if you have talked with one recently, you may want to try again, as the payment requirements are easing. Don’t be worried that counseling will affect your credit the same as bankruptcy. That’s not true anymore. FICO has changed their credit scoring model: When they calculate credit scores, they now ignore the fact that a consumer has gone through credit counseling. If you can pay back your debts through a Debt Management Program (DMP), do so.

I also recommend that you talk with a bankruptcy attorney who can help you evaluate the bankruptcy option. There are many wrong assumptions about bankruptcy floating around, including the notion that you can’t file if you make too much money. Only an attorney can give you the straight scoop on whether filing makes sense for your situation.

Finally, go in with open eyes. With settlement (like everything else), if it sounds too good to be true, it probably is.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com. Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of the e-book Reduce Debt, Reduce Stress: Real-Life Solutions for Your Credit Crisis

Comments

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[Adam Smith]

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