Debt settlement is an aggressive approach to becoming debt free relatively quickly, typically taking two to four years to be completely debt free on all unsecured debt consisting of credit cards, personal loans, hospital bills, and even third party collection accounts are eligible, however once your creditors have decided to sue you and you have been served, this option is no longer available.
Let’s take an example of a two income household in the state of Illinois; we will fictitiously call them the Jones. The Jones’s are experiencing the hardship of one lost income, combined with the additional difficulties that higher minimum payments and interest rates are en vogue with the creditors, such as Chase see Consumer affairs article “Chase raises minimum on credit cards” http://www.consumeraffairs.com/news04/2009/06/chase_payment.html.
In the above example we will assume that the ongoing stable income is: $62,500 and the lost income was: $48,500. The household’s total income was once 111,000, but now with unemployment paying out a maximum of 25,550 is reduced to 88,050 about a 20% drop in the household’s total income. See, “Maximum weekly unemployment benefits by state” By The Associated Press Thursday, November 20, 2008 Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2008/11/20/national/a140117S46.DTL#ixzz0OSeUv9KH
Now the Jones’s have credit card debt that totals $28,750 and their minimum payments were $575 or 2% of the outstanding balance. However, because some of their creditors have increased their minimum payments to as much as 5% of their outstanding balance on their accounts the new minimum payment is: $1,006.25 or (3.5 % an average of all of their accounts minimum payments).
Now with one of the Jones’s on unemployment at a significantly reduced income the creditors are threatening to close accounts or raise interest rates. Moreover, the Jones’s want to avoid the balance transfer traps that got them into this precarious position in the first place. They are considering the following alternatives: Bankruptcy chapter 13, Home Equity loan, Debt consolidation loan and Debt settlement-negotiation. The Bankruptcy will stay on their credit for 7 years and they will be forced to make a payment schedule with their creditors, that if they miss any payments at all that are due under their Plan, their case will be dismissed by the Court, so they want to avoid that. The home equity loan will change the nature of their debt from unsecured to secured, so now if they default on their credit cards they risk losing their home so they rule out that option. The consolidation loan and debt settlement-negotiation are the last two options. The Jones’s are unfortunately not eligible for a favorable rate and or terms if they qualify at all for a consolidation loan because of their diminished credit score as they have been 30 days late on a few of their open revolving accounts and their once stellar credit score has now dropped below 600. So that leaves them with the Debt Settlement-negotiation method as their best alternative to getting out of this mess. Here’s how it will work for them, the $28,750 of total unsecured debt will be enrolled into the debt settlement program and will settle for approximately 65% of their current balances or $18,687.50. The Jones’s will be debt free in approximately 36 months by making escrow deposits into a settlement account that they have complete control over at a scheduled contribution of $519.01 (including service fees to the debt settlement company), that facilitates the negotiations and settlements for the Jones’s final approval, coincidentally about the same as they were paying prior to the creditors making egregious unilateral changes. The total amount of scheduled contributions inclusive of service provider fees is $18,687.50. They have the flexibility to accelerate or miss a month, and they realize that their creditors are not being paid on a monthly basis, because it is their intent to negotiate a more favorable financial outcome for themselves. Their creditors are advised that they are being represented and that they will receive cease and desist letters requesting them to direct all future contact to the attorneys that will be working on their behalf to resolve these matters. They may continue to call but they are on notice that any breach in the fair debt collection act will be noted in a log that the Jones’s will be keeping and that they may be entitled to restitution for and such breach. The Jones’s intend to enroll in a credit restoration program to ensure that their credit score is maximized, now that their debt to income ratio is significantly improved after the 3 year program’s completion.
So in summary, the Jones’s monthly discretionary income went up by almost $500, the difference between their total minimum payments of: $1,006.25 to the creditors and there scheduled contribution of $519.01, saving them $487.24 every month. Now if the unemployed member of the Jones’s household should find suitable employment with pay commensurate, the good news for them is there are no pre-payment penalties and they could of course accelerate there contributions and be debt free faster.
They are certain that there is light at the end of the tunnel and they are well on there way to being foot loose and fancy free, debt free! Unless, the other member of the house lost there job and they both were not working it may be off to the bankruptcy courts.
About the Author:
Mr. Abraham Brad Cozzi, has over 15 years of professional experience in the employee benefits arena. He currently specializes in Debt management, foreclosure prevention and loss mitigation professional services within the employee benefits arena; with his new joint venture, Two Bridge Debt Resolutions, located in the Two Bridge district of New York City, and may be reached at (646) 839-8524 or twobridgedebtresolutions@GMAIL.COM
* All figures on this page are examples only. Rates, payments and settlement amounts vary, and are subject to change.
Tags: bankruptcy, debt consolidation, debt negotiation, debt settlement
